Breaking News Bar
updated: 4/22/2014 7:50 AM

Grieving borrowers told to repay student loan

hello
Success - Article sent! close
 
Associated Press

WASHINGTON -- Some student loan borrowers who had a parent or grandparent co-sign the note are finding that they must immediately pay the loan in full if the relative dies.

The Consumer Financial Protect Board says lenders have clauses in their contract that explain this could happen, but many borrowers are not aware of them.

Order Reprint Print Article
 
Interested in reusing this article?
Custom reprints are a powerful and strategic way to share your article with customers, employees and prospects.
The YGS Group provides digital and printed reprint services for Daily Herald. Complete the form to the right and a reprint consultant will contact you to discuss how you can reuse this article.
Need more information about reprints? Visit our Reprints Section for more details.

Contact information ( * required )

Success - request sent close

The agency's ombudsman, Rohit Chopra, said complaints related to this issue are growing more common because the practice is catching so many consumers by surprise. Some borrowers told to pay back the loan in full have been making timely payments, Chopra said.

While it's unclear how prevalent it is; Chopra said it appears to be the practice among many private student loan lenders. It has affected borrowers not just when the co-signer has died, but when the co-signer has declared bankruptcy.

"We do have some concerns that with an aging population and with very long terms on certain private student loans, that this could actually increase over time," Chopra said.

The issue doesn't impact federal student loans, which are more commonly issued than private student loans. In the private loan industry, 90 percent of loans were co-signed in 2011, and having a co-signer can often lead to a lower interest rate, a report released Tuesday by the bureau said. Before the financial meltdown of 2009, private loans were more commonly issued, but many borrowers still owe money on them. They generally have higher interest rates than federal loans.

In response, Richard Hunt, president and CEO of the Consumer Bankers Association said in a statement that its members work with their customers "carefully and compassionately" and it is common practice for the lenders to release co-signers from loan obligations.

"We are not aware of lenders accelerating the payment of a loan in good standing upon the death or permanent disability of a co-signer as a typical practice and believe it to be a rare occurrence," Hunt said.

Chopra, however, said even as many financial companies advertise the ability to release a co-signer from a loan, they make it complicated to do so. He didn't specify the number of complaints the agency received.

The report said the practice might occur because some lenders rely on third parties that automatically trigger a default "regardless of individual circumstances."

"While these acceleration options may have a legitimate business purposes, it seems that private student lenders and servicers may not always be acting in their own self-interest by accelerating balances and placing loans in default," the report said.

The co-signing issues impacting private student loans are generally different than those associated with loans such as a mortgage because collateral like a house is not put down to obtain the loan.

Share this page
Comments ()
Guidelines: Keep it civil and on topic; no profanity, vulgarity, slurs or personal attacks. People who harass others or joke about tragedies will be blocked. If a comment violates these standards or our terms of service, click the X in the upper right corner of the comment box. To find our more, read our FAQ.
    help here