Parents and grandparents who signed on to their kids’
private student loans are having trouble getting out of
them, even when their student is successfully paying
back the debt, a report suggests.
About 90% of co-signers who applied to be released
from a private loan were rejected, according to a
Consumer Financial Protection Bureau review of
thousands of complaints about private student loans.
Often student borrowers can’t qualify for a private
loan without a co-signer and even if they do, a more
credit-worthy co-signer could give them access to a
lower interest rate.
Credit scores are at risk
“Parents and grandparents put their financial futures
on the line by co-signing private student loans to help
family members achieve the dream of higher
education,” said CFPB Director Richard Cordray in a statement accompanying the report.
“Responsible borrowers and their co-signers should
have clear information and standards for releasing the
co-signer if the time is right.”
These provisions affect a small slice of the student
loan market – just 8% of student loan balances were
held by private lenders, according to a Wall Street
Journal report. Many companies tightened their
standards or exited the field completely in the wake of
the financial crisis, but as financial institutions search
for ways to draw in young customers who may use
their products in the future, they’re increasingly
targeting student loan borrowers.
In fact, more than 90% of private student loans
required a co-signer compared to 67% just 10 years
ago, the CFPB says. Because a co-signer is equally
responsible for the loan, signing on can put their
ability to access other forms of credit at risk.
Read the fine print
That’s partially why most lenders advertise the ability
to release co-signers from their obligation if the
borrower is paying the loan back on time and has
good credit. But borrowers are rarely notified when
they’re eligible to apply for a co-signer release,
information on these provisions is difficult to find on
lenders’ websites and the bulk of co-signer
applications are rejected, the CFPB indicates.
The CFPB analysis found that many lenders don’t
include a specific credit score floor necessary for
releasing a co-signer. The lack of these specifics
“raises questions about whether lenders have set
reasonable requirements for borrowers seeking to
obtain this commonly-advertised benefit,” the report
Many borrowers also reported to the CFPB that their
co-signer release application was rejected if the loan
was ever put into forbearance, a mechanism that allows borrowers to temporarily suspend or lower
payments on their loans.
Another complicating factor is that many private
student loan contracts have provisions that allow for
the loans to automatically be placed in default if the
co-signer files for bankruptcy or dies, even if the
borrower is making payments on time, the CFBP
finds. Without an easy way to release a co-signer
from their obligations, the primary borrower is at risk
of ending up in default if something happens to their
co-signer. Still, several lenders told the CFPB they
don’t place loans in “auto default” anymore.
Consumer advocates advise student loan borrowers
to use private loans only when they’ve exhausted all
of their options for federal money. Government
student loans offer borrowers a fixed interest rate
regardless of their credit history, as well as a variety
of safety nets and repayment options if a borrower
falls on hard times.
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