The Consumer Financial Protection Bureau (CFPB) is living up to its promise to be a watchdog on the student loan industry. Last week, they issued a report on private student loans that should cause all borrowers with a cosigned loan to sit up and take notice. The report covers the six months from October 2013 through March 2014 when CFPB received more than 2,300 complaints related to private student loans and another 1,300 complaints related to student loan debt collection efforts.
Loan documents are typically multi-page and printed in mind (and eye) numbingly small print, which makes it hard to read every word of the terms and conditions even if you were so inclined. Typically, your lender just points you to where you need to sign and initial and rushes you through the process. They certainly don’t take the time to explain the finer points of the loan to you, particularly those that relate to default and other dire conditions.
Most private loan documents have a clause that states if your cosigner dies or files for bankruptcy, your loan can be called in. This means the entire balance is immediately payable and due. What’s particularly onerous about what the CFPB revealed is that this has been happening even when the loan is completely current. This is of major concern to private student loan holders as CFPB reports that 90% of private loans carry a cosigner.
Imagine your father cosigned your loan and you’ve been faithfully making payments for the past three years. Your father suffers a heart attack and dies and you’re horribly grief stricken. And just as you’re beginning to pull it together emotionally, you get a notice in the mail that your student loan is in default despite your years of on-time payments. That adds insult to injury and seems grossly inappropriate.
Automatic default occurs when notification of death or bankruptcy of a co-signer is received by your loan servicer (this may be an outside firm hired by your lender) and if your loan agreement contains the aforementioned clause, the service may put you into auto-default, which triggers the loan coming due in full upon notice. Some servicers pursue the assets or threaten to place liens on property of the estate of the deceased cosigner. This can make life harder on your surviving parent or grandparent unnecessarily.
CFPB has proposed that lenders adopt the following alternatives to auto-default when a cosigner dies or files bankruptcy:
- Evaluate the borrower for cosigner release based on a history of consistent payments for a sufficient period that the lender knows they are a good credit risk.
- Offer the borrower the opportunity to find a replacement cosigner so that the loan can maintain status quo.
- Give the borrower sufficient time to refinance the loan with another lender.
We also offer the following suggestions to the private loan holder to protect themselves from the risk of auto-default:
- Purchase a life insurance policy on your cosigner for the amount of your student loan balance. Term life insurance is affordable and you can set the term of the policy to match the remaining period of your loan.
- If your cosigner is having financial difficulties and is considering bankruptcy, talk to them and see if you can help them with their bills to forestall the filing until you can get cosigner release or finish paying off your loan.
- Look for a refinance deal that doesn’t carry an automatic default clause in the terms and conditions. If your cosigner is in poor health or is struggling financially, do this sooner rather than later.
You can read the full CFPB mid-year report here. And be sure to sign up for Tuition.io’s free student loan tool that allows you to keep up with all your loans, both federal and private, in one simple dashboard that tells you total debt, monthly payments, payoff dates and allows you to check out how making additional payments will get you out of debt sooner. Check out our Student Loan Help Center for more information on private loans, default and refinancing.