According to the Consumer Financial Protection Bureau (CFPB) report published on April 22, a few people who repay student loans before the due date are put in the default list if the co-signer of the loans declares bankruptcy or dies.
Unfair auto defaults
Such defaults or “auto defaults” compel borrowers to repay the balance of the loan immediately or risk ruining their credit history. If such a thing happens, then the chance of renting accommodation, purchasing a car or getting gainful employment comes down considerably.
This practice is prevalent in the loan market for private students where banks and similar financial companies offer educational financing. Such private loans usually carry a higher rate of interest and reduced number of protections compared to federal loans. Borrowers frequently need another person to co-sign agreements to assure repayment.
The CFPB and its advisory
The consumer bureau, in its middle of the year report concerning complaints on student loans, has highlighted grievances that have surfaced with approximately 90 percent private student loans being co-signed. The CFPB has received about 2,300 complaints concerning student loans. In the majority of the cases, the non-existent default status was triggered when the co-signer died or went bankrupt. This happened even when the loan was paid before the due date.
To reduce the burden imposed on borrowers, lenders are recommended by the CFPB to consider a number of alternatives to such defaults, like giving borrowers a chance to search for another co-signer. A sample letter set has also been issued by the bureau, which the consumers can utilize to petition the lenders so that a co-signer can be released from the contract.
The advantage oflower interest rate can be enjoyed by students if their parents shoulder legal responsibility of loans as co-signers.
Repaying a loan
According to Rohit Chopra, CFPB ombudsman, loans taken for private studies can take a number of years to repay, and many co-signers like grandparents or parents are not aware that their financial distress or even death may end in sudden default or full repayment of the loan in a single time.
Lenders by and large release co-signers from loan agreements in case the borrower has been consistently made their payments on time. According to the report, however, a few loan services and lenders force borrowers to go through extra procedures to get a release. Many consumers have submitted complaints to the CFPB that lenders have arbitrarily changed requirements of getting such a release.