As I was getting ready for work this morning and thinking about student loans (as a typical financial writer may do…), it occurred to me how narrowly I missed the the madness that is private student loans. I don’t remember what year it was, but I strongly remember standing in the financial aid office and being told that my federal loans weren’t going to cover the tuition increase that semester…
…It took everything in me not to burst out into tears at that moment. I was already working several jobs just to afford books and a car to get me to and from school – there was no way I could scrounge up enough money to make up for the deficit in tuition. But I wasn’t about to take off for a semester. I worked too hard to stall my education and I would’ve done just about anything to find funding for the next year.
Luckily, it all worked out and they were able to allocate more federal funds for me so I could continue on with my degree. While I may be stuck in a 20 year repayment plan now, I have my degree and couldn’t be happier. What’s even better, my loans are all federal and I didn’t need a cosigner.
Why does that matter? Because the already risky private student loan market has recently proved more risky thanks to a report done by the CFPB. This report uncovered stories of students with cosigners suddenly going into default – even if they were current on their loans. Read on to find out why.
How Your Cosigner Can Send Your Private Student Loans Into Default
The whole idea behind a student loan cosigner is to make it easier for lenders to hand out a large chunk of money to a person who’s still too young to have established income or credit. On one hand, it’s great. Students get the funds they need to go to school while lenders can protect themselves by knowing there’s a backup if the student doesn’t pay.
But then there’s the tricky part: who’s likely to become the cosigner. In many cases, it’s a parent or a grandparent. However, if the origination of a loan depends on the financial status of the cosigner and something happens to the cosigner, the consequences are harsh:
It doesn’t matter if the primary borrower is current on their payments – the loan was agreed upon only on the condition of the cosigner’s solid financial status. If the cosigner declares bankruptcy or passes away, the loan becomes null and void. CollectionsandCreditRisk highlights this growing problem:
“’Students often rely on parents or grandparents to co-sign their private student loans to achieve the dream of higher education. When tragedy triggers an automatic default, responsible borrowers are thrown into financial distress with demands of immediate repayment,’ said CFPB Director Richard Cordray in a press release. ‘Lenders should have clear and accessible processes in place to enable borrowers to release co-signers from loans. A borrower should not have to go through an obstacle course.’”
As if that weren’t tough enough, preemptively releasing a co-signer from a loan to avoid problems like this is even more challenging:
“Borrowers also said they had trouble releasing a co-signer from the contract due to elusive processes by the lender, even when it specifically advertised it as hassle free before the loan was signed. Those issued can also trigger unexpected defaults, the CFPB said.”
So if you’re a young professional now in a healthy financial situation, your finances could still get rocked if you can’t release your co-signer and something happens to them.
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The Consequences of Student Loan Default
Student loan default is serious. Default means you have to pay in full right away. And if you can’t, and the default gets reported to the credit bureaus, your credit score can tank. Scary enough – made worse by the fact that these students don’t always get advanced notice. The Consumerist further highlights how this can happen:
“The CFPB consistently receives complaints from consumers who discover they are in default with their private student loans after their co-signer has died. While many consumers believe the death of a co-signer would result in a release of the co-signer’s obligations to repay, that simply isn’t the case. Instead of continuing to pay their loans as they normally would, borrowers reported they received notice to pay in full after a co-signer’s death.
Additionally, borrowers whose loans are current filed complaints with the CFPB after receiving phone calls from debt collectors notifying them their loans are in default because their co-signer has filed for bankruptcy protection. Borrowers also reported they were unable to receive billing statements, pay for their loans online or request additional information once the co-signer’s bankruptcy proceedings began.
While these automatic defaults are no fault of the borrowers, their consequences can be felt far in the future. Student loan services are reporting these automatic defaults to credit bureaus negatively impacting the borrower’s credit profile, which, in turn, makes it challenging to qualify for future loans and purchases or even to obtain employment.”
If this happens to you, the best thing to do is contact your student loan servicer immediately to work out a repayment plan. Once you do, you may even want to consider consolidating with a new private student lender at a more favorable rate and terms.
If this hasn’t happened to you, the best thing you can do is get a release from your cosigner as soon as you’re fiscally able to do so.
How to Get a Release from Your Cosigner
Getting a release from your cosigner may not be a simple thing to do. CollectionsandCreditRisk discusses the possible trouble you may run into:
“‘Borrowers continue to report to the CFPB about barriers when pursuing a co-signer release. For example, consumers note that required forms are often not available on websites or in an electronic form,’ said Rohit Chopra, the CFPB’s student loan ombudsman, in the report. ‘In addition, consumers’ complaints suggest that servicers do not seem to be proactively notifying consumers about the specific requirements to submit a request for a release.'”
That doesn’t mean you shouldn’t try! The CFPB has made it easier by sharing some sample cosigner release letters you can use to start the process. This is an option that can benefit you and your cosigner, so jumping through the hoops to make it happen now (rather than dealing with a default situation later) could be well worth it.
Staying On Top of Private Student Loans
Student loans are quickly becoming the number one financial stressor for students, graduates, and adults later in life. Knowing your rights and proactively guarding yourself and your finances is key. For more information on how to remain in good standing on your private student loans, check out our Student Loan Resource Center.
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