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CFPB looks to stem 'Auto-Deafults' on private student loans

New federal report shows some private issuers of student loans seek immediate repayment if a co-signer dies or files for bankruptcy court protection

By Ananth Baliga

WASHINGTON, April 22 (UPI) -- The Consumer Financial Protection Bureau said people who pay private student loans can be put on default when the co-signer of their loan dies or declares bankruptcy.

The report out Tuesday says that borrowers can be placed in auto-default forcing them to pay the full loan balance or ruining their credit rating. This could affect borrowers' future employment prospects or hinder them when buying an apartment or a car.

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Even borrowers who have good repayment records can be forced into default. The report highlights a little-known provision in private loan contracts, which states that if the co-signer dies or files for bankruptcy, the lender can demand immediate and full loan payment, even if the borrower has a good repayment record.

The CFPB, in its mid-year report, received 2,300 complaints about private student loans submitted to the bureau where the student was placed in default despite regularly paying the monthly installments.

The bureau has recommended that lenders give such people the chance to find another co-signer. They also issued sample letters that consumers could use to petition lenders to request releasing the old co-signer from the contract.

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Rohit Chopra, the bureau’s student loan ombudsman, said that he wasn't sure how widespread the practice was but that the bureau has been receiving a steady stream of complaints from borrowers.

“Private student loans can sometimes take many years to pay off, and parents or grandparents may be unaware that their own financial distress or death can lead to a sudden default and demand for payment in full,” Chopra said.

Normally a lender will process a request for changing a co-signer if the borrower has made consistent on-time payments. But some lenders and and loan servicers have borrowers submit additional paperwork, such as proof of graduation, transcripts, employment or salary and may even conduct credit checks. While the CFPB did not assign blame to any lender, Chopra said that there were major companies following the practice.

“Most of the larger players in the industry do have contracts that contain these options,” said Chopra.

Private student loans account for $150 billion of the $1.2 trillion in outstanding student loan debt but represent a disproportionate amount of the complaints received by government agencies.

[Washington Post] [The New York Times]

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