Most borrowers who seek to have a co-signer released from a private student loan are turned down by their lender, according to a new report by the Consumer Financial Protection Bureau.
The major lenders rejected 90 percent of requests for co-signer release made over the course of a year, says the report. The lenders’ refusal left both borrower and co-signer vulnerable to financial distress and credit damage, it says.
“Parents and grandparents put their financial futures on the line by co-signing private student loans to help family members achieve their dream of higher education,” said the bureau’s director, Richard Cordray.
Since the financial crisis struck, in 2008, most lenders have required co-signers on private student loans. Creditworthy co-signers can help students take out loans or obtain lower interest rates, and can step in if borrowers can’t repay their debts.
But co-signing has drawbacks for both parties. Loans count toward co-signers’ debt totals and can affect their credit score if not repaid. Co-signers can also have a harder time obtaining an affordable interest rate on their other uses of credit, such as mortgages and car loans.
Borrowers, meanwhile, can be cast into default if a co-signer dies or goes bankrupt, as a report by the bureau showed last year. The report said that some lenders demand immediate payment in full upon the death or bankruptcy of a co-signer, even when the borrower is current on the loan. Borrowers who don’t or can’t comply are put into default. In some cases, the report said, lenders don’t even give borrowers a chance to repay, placing them in “auto default.”
The latest report is based on information that the bureau collected from the major lenders over the past year, as well as more than 4,000 complaints that borrowers submitted to the bureau over a six-month period. It concludes that most private-student-loan contracts continue to contain auto-default clauses, while providing borrowers with little information about the criteria needed to obtain a co-signer release.
Meanwhile, some lenders disqualify borrowers from releasing a co-signer if they postpone repayment through forbearance.
The report calls for increased transparency of the criteria for co-signer release, and urges lenders to notify borrowers proactively when they qualify for such a release.
Kelly Field is a senior reporter covering federal higher-education policy. Contact her at kelly.field@chronicle.com. Or follow her on Twitter @kfieldCHE.