You have been faithfully making your student loan payment each month, and are making steady progress paying down the balance. But then your parent — who cosigned your loan — dies or files for bankruptcy protection. All of a sudden, your lender is demanding that you repay the loan in full, even though you have never been late with a payment.
Such automatic defaults are a recurring problem with private student loans, a new report from the federal Consumer Financial Protection Bureau finds.
The report analyzed more than 2,300 private student loan complaints and roughly 1,300 debt-collection complaints related to student loans submitted to the bureau since Oct. 1, 2013.
Rohit Chopra, the bureau's student loan ombudsman, said that the agency cannot say how many borrowers are affected by automatic defaults. The problem crops up with multiple lenders and loan servicers.
Most student debt is from federal loans, which students borrow on their own, generally without a co-signer.
The rules are different, though, for private loans. While such loans make up a much smaller share of the market, most high-debt borrowers have private loans, according to the bureau. Private loans usually require a co-signer, who is expected to step in and pay if the borrower cannot; more than 90 percent are cosigned, often by a parent or grandparent.
The automatic default can have devastating financial consequences for borrowers when it appears on their credit report because not only lenders, but also potential employers and landlords, may check credit reports.
Here are some questions about private student loans and co-signers:
How quickly can an automatic default appear on my credit report after my co-signer dies or files for bankruptcy?
That varies, depending on how quickly the lender is notified of the death or bankruptcy filing. But many lenders report to credit bureaus every 30 days, so it could show up on your credit report fairly quickly.
Can I ask to have my co-signer released from my loan?
Lenders often promote the option of having a co-signer released if the borrower has made a certain number of consecutive, on-time payments, typically, for at least two years, and has good credit. However, it is not always clear what criteria borrowers must meet to obtain a release. The bureau's report cited an instance in which a borrower met a lender's requirement of making 28 on-time payments, but then was told by the lender that 36 were required; after making the additional payments, the borrower was told the policy had changed and 48 payments were required.
How do I know if I'm eligible to have my co-signer released?
You should ask the loan servicer for details about its policy and request a release as soon as you think you meet the criteria, to help avoid the problem of a sudden default if anything happens to your co-signer. Co-signers can also directly request a release; the bureau provides sample letters for them to use.