Personal Finance

April 21, 2014

Consumer protection agency warns about automatic defaults on private student loans

The federal Consumer Financial Protection Bureau on Tuesday released a report about the problem of “automatic defaults” on private student loans.

The federal Consumer Financial Protection Bureau on Tuesday reported that some people who faithfully pay back their private student loans are being surprised with sudden "automatic defaults."

CFPB Student Loan Ombudsman Rohit Chopra said that the agency has heard from borrowers in good standing who suddenly have their loans placed in automatic default when the parent or grandparent who co-signed the loans dies or files for bankruptcy.

The default is serious because it harms a person’s credit rating and can make it impossible to get a mortgage or business loan, Chopra said.

CFPB director Richard Cordray said that lenders should have “clear and accessible processes in place to enable borrowers to release co-signers from loans.”

Richard Hunt, president and CEO of the Consumer Bankers Association, said in a statement that members of the association work with their customers with compassion in tragic circumstances. Hunt said it is common practice for student loan lenders to release cosigners from loan obligations if the student borrower dies or is disabled.

In addition, he said, “We are not aware of lenders accelerating the payment of a loan in good standing upon the death or permanent disability of a cosigner as a typical practice and believe it to be a rare occurrence.”

Chopra, however, said that the practice was mentioned in complaints to the agency. The problem was only with private student loans, not federal ones, he said. Federal student loans rarely require another person to sign on to a loan and when they do they do not lead to sudden defaults, he said.

The CFPB report said lenders can take steps to avoid pushing a private student loan borrower into default and demanding the entire loan balance when a co-signer dies or goes bankrupt. In some cases, the lender can determine that the borrower qualifies for a co-signer release.


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