Banks can ruin the credit scores of college students if that person’s cosigner dies or enters into a bankruptcy. When such a circumstance occurs, the student loan goes into an auto-default status.
Co-signers are equally responsible for any loan granted a student. Federal loans do not usually require a cosigner. Many loans issued by private lenders do. According to a 2012 report from the Department of Education and the Consumer Financial Protection Bureau (CFPB), close to 90 percent of private student loans have cosigners. Auto-default has affected 3,600 loans from October 2013 to March 2014. The number is expected to grow.
Richard Cordray, a CFPB director, say college students rely on their parents or grandparents to cosign their loans. Banks insisting the outstanding loan balance be immediately repaid upon a cosigner filing for bankruptcy or that person passing away hold too much control over the loan. It does not matter if a student’s repayments are current.
Failure to immediately replay the loan balance triggers an auto-default notice that is handed over to a debt collection agency. The result is a regular series of calls for a payment. When the debt is not paid, the information is entered on the borrower’s credit score.
In most public college loan contracts, there is a standard clause where the borrower consents to immediately repay the loan in full when the cosigner enters into a bankruptcy or dies. Borrowers in previously good standing have begun complaining their credit scores have been damaged from such stipulations. College loans are not eligible to be removed with a bankruptcy.
Some lenders are willing to remove the cosigner only if the borrower makes a certain number of on time repayments. Other lenders make credit inquiries to ensure the borrower can repay the amount owed before issuing an auto-default.
The CFPB has not declared the banking auto-default policy deceptive or an unfair practice. The organization recommends lenders consider other options.
First would be for borrowers insisting on ways that the cosigner be released from the loan should that person die or file bankruptcy. Second, would be for a new person to become the cosigner without the loan going into auto-default. Borrowers and cosigners should first shop banks before entering into a contract.
If the loan is already signed, the CFPB has prepared two sample letters on its website; one for the borrower, the other for the cosigner. Each party can edit the letters to their liking and send them to the lender.
Both ask similar questions. Can the cosigner or borrower be released from the loan? Would the bank clarify if such a release is possible? If a release is not possible, would the bank provide an adequate explanation as to why? Under what conditions could the borrower or cosigner be eligible for a release from the loan? Are there steps to qualify for such a release for the borrower or cosigner?
With colleges and universities raising their tuition costs every year, more students find themselves unable to continue their education without assistance. When the cosigner enters into bankruptcy or dies, banks demanding an immediate repayment of the loan can ruin a student’s credit score by issuing an auto-default.
By Brian T. Yates