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CFPB: Industry Inquiry Reveals Problems for Consumers Seeking to Prevent Auto-Defaults
Wednesday, June 24, 2015 6:30 AM

Thursday, the Consumer Financial Protection Bureau Student Loan Ombudsman released a report finding that high rates of consumers are being rejected for co-signer release on their private student loans, based on its review of industry practices.

The Bureau uncovered problematic industry practices that may be disqualifying some consumers from securing a co-signer’s release from their loans. When student borrowers and co-signers seek a co-signer release but are unable to obtain it, the co-signer can suffer from damage to their credit or be subject to higher rates on other forms of credit. This can also result in serious financial distress for the borrower if a company triggers an auto-default when a co-signer dies or goes bankrupt.

“Parents and grandparents put their financial futures on the line by co-signing private student loans to help family members achieve the dream of higher education,” said CFPB Director Richard Cordray. “Responsible borrowers and their co-signers should have clear information and standards for releasing the co-signer if the time is right. We’re concerned that the broken co-signer release process is leaving responsible consumers at risk of damaged credit or auto-default distress.”

Student loans make up the nation’s second largest consumer debt market. Today there are more than 40 million federal and private student loan borrowers, and collectively these consumers owe more than $1.2 trillion. While private student loans are a small portion of the overall market, they are generally used by borrowers with high levels of debt who also have federal loans. In general, private student loans carry higher interest rates and lack flexible repayment options, compared to federal student loans. Unlike other markets, independent data on the size and performance of the private student loan market is not available to investors and the public.

Most private student loans require a co-signer. In fact, according to a 2012 report on private student loans published by the CFPB and the Department of Education, while co-signers were less often required during the years prior to the financial crisis, by 2011 more than 90 percent of new private student loans were co-signed, often by a parent or grandparent.

A co-signer may help a borrower access credit or obtain a lower rate because they may be more creditworthy and can step in if a borrower is unable to repay. However, borrowers have also been hit with a default because of activities related to the co-signer, even if the borrower is paying on time. The loan will appear on the co-signer’s credit record, which will count toward the co-signer’s total debt level and can affect the co-signer’s credit score if the loan is not repaid. 

Consumers also can be at a disadvantage if they are unable to obtain a co-signer release. For example, a co-signer may have a more difficult time obtaining an affordable rate on other credit, making it more expensive to refinance a home or to buy a car.

Review the CFPB Student Loan Ombudsman’s Mid-Year Update.

To help borrowers overcome obstacles to co-signer release, the CFPB published a set of sample letters for private student loan borrowers and their co-signers that they can send to the private student loan servicer. These letters instruct servicers to provide clear information about co-signer release policies.

Last month, the CFPB launched a public inquiry into student loan servicing practices that can make paying back loans a stressful or harmful process for borrowers. The issues that the Bureau is seeking information on include industry practices that create repayment challenges, hurdles for distressed borrowers, and the economic incentives that may affect the quality of service. The comment period is open until July 13, 2015.

The CFPB also launched a new version of the Repay Student Debt tool, which helps borrowers get unbiased tips on how to navigate student loan repayment, along with other sample letters they can send to their student loan servicers.