Problems with co-signing a private student loan?

Wednesday, May 07, 2014

Recently, the Consumer Financial Protection Bureau (CFPB) released its mid-year report on student loan complaints, including a summary of thousands of complaints from borrowers dealing with private student lenders and co-signer issues.

The CFPB reports that 90% of private student loans, which do not have the same consumer protections as federal loans, were co-signed in 2011 (usually by a parent or grandparent). Federal student loans are funded by the federal government. Private student loans are made by lenders such as Sallie Mae, banks, credit unions or schools.

Many people complained that private loan contracts are confusing or don't outline specific terms. For example, private lenders may advertise an attractive option to release co-signers after the borrower makes a certain number of on-time payments. But the CFPB says it received hundreds of complaints describing obstacles borrowers face when they seek to relieve co-signers from obligations for the loans.

In particular, Rohit Chopra, the CFPB's student-loan ombudsman, said borrowers may be required to have certain credit scores before a co-signer can be released. In many cases, this stumbling block was not revealed upfront or spelled out in loan documents.

Contracts may also contain provisions that allow the lender to put the borrower's loan in default—even loans in good standing—when a co-signer dies or declares bankruptcy. Chopra says that "borrowers need to be aware that these [automatic] defaults can seriously impair their credit," making it difficult to borrow in the future.

Need help?

If you are a borrower with a private student loan or a co-signer of a private student loan, send a personalized version of the CFPB's sample letters to your loan servicer asking about options to release co-signers.

The CFPB also provides a sample letter you can use to get information about how your private student loan servicer processes payments greater than the minimum amount due. This information can help borrowers who want to pay off their loans more quickly.

Mail your personalized letter, or log into your account on the servicer's website and paste the text into the "Send a Message" or "Contact Us" feature. For more information on co-signing a loan, read this Federal Trade Commission (FTC) article on what to consider before you sign.

If you have a problem with a student loan, you may submit a complaint to the CFPB online or call 855-411-2372.