When signing up for a private student loan, you would not expect that a co-signer could hurt or jeopardize your credit. Since private student loans tend to have higher interest rates, oftentimes student borrowers get a co-signer in order to reduce those rates.
After 2008, the number of loans with co-signers increased from 67 percent to over 85 percent in 2009, stated a Consumer Financial Protection Bureau report. By 2011, over 90 percent of private student loans had a co-signer.
However, a recent study finds that private student loan borrowers can be placed in a default if the co-signer is deceased or files for bankruptcy. According to the U.S. Department of Education, a default usually occurs when the borrower fails to make payments. Once in default, borrowers can be forced to immediately repay the entire loan balance along with any interest the loan may have. Other consequences of going into default include losing the ability for deferment, forbearance, and repayment plans.
“Many private student loan contracts include an option for lenders to demand the full balance of a loan when a borrower’s co-signer has died or filed for bankruptcy,” the authors of the study wrote. “Complaints from private student loan borrowers suggest that industry participants are automatically placing loans in default — even when the borrower is paying as agreed.”
Not only can a default hurt a borrower’s chances from paying back the loan in payments, but it can also jeopardize chances to buy a car, rent an apartment or get employment. Releasing a co-signer from the loan seems like an easy fix. The report notes that most lenders allow the release of a co-signer after a certain time and/or once a set number of on-time payments have been made. However, this method of release doesn’t always work out.
The authors of the report highlight a borrower’s case in their 2013 report where the borrower was told his co-signer would be released after 28 on-time payments. Once the payments were completed, it turned out the borrower had to make 36 on-time payments for a co-signer release, and once those payments were completed, the policy changed the requirement to 48 on-time payments before the borrower could apply to release the co-signer.
Moreover, steps on how to release a co-signer aren’t always clear or easy to follow. “Consumers note that required forms are often not available on websites or in an electronic form,” the authors wrote. “In addition, consumers’ complaints suggest that servicers do not seem to be proactively notifying consumers about the specific requirements to submit a request for a release.”
The CFPB has provided sample letters on their website that student loan borrowers can send to lenders or servicers to request a co-signer release. Clear questions on the lender’s policies or clarification on how to be released from a loan are included to help student loan borrowers continue to be in good standing with their loans.
“[O]paque policies related to borrower benefits such as co-signer release, reinforce the need for management to be closely reviewing complaints[…]” the CFBP wrote. “…Private student loan servicers should assess whether they are providing clear and accurate information about co-signer release and other benefits.”