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Private student loans may become due immediately when co-signer dies

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Co-signer issues are a major source of complaints reported to the Consumer Finance Protection Bureau (CFPB), the agency revealed in its mid-year report on student loans released today. Some lending institutions include a clause that throws a student loan into default when a co-signer dies or goes into bankruptcy, even though the student is current with loan payments. According to the CFPB, some borrowers have complained that lending institutions demand the borrower make full payment as they are burying the loved one who co-signed their education loans. Some loan issuers attempt to collect from the deceased’s estate.

In the case of a co-signer going into bankruptcy, borrowers complain that they stop receiving loan statements and are unable to access their accounts on-line. Although students are current with their loans, they are reported as “in default” to credit agencies. The CFPB notes that this black mark on a credit profile can hinder a student’s ability to find a job.

Since the financial crisis of 2008, banks have tightened borrowing criteria, requiring about 90 percent of private student loans to have a co-signer. In 2008, only 67 percent of private student loans were co-signed. Most often co-signers are parents or grandparents. Another complaint reported to the CFPB is the confusion over how to discharge a co-signer’s obligation. Many loan institutions, when promoting their loan products, advertise that co-signers may be released after a certain number of on-time payments. Borrowers complain they face many obstacles when trying to get these releases.

The CFPB analyzed the more than 2,300 complaints they received between Oct.1, 2013 and March 31, 2014 related to private student loans. The bi-annual report is required under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB maintains a database of consumer complaints about financial products and services. The Bureau, an independent agency of the federal government, is tasked with enforcing federal consumer finance laws, educating consumers about financial products and analyzing data related to consumer financial products.

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