Federal Agency Asks Student Lenders to Change Default Rules

Tuesday, 22 Apr 2014 01:15 PM

By Courtney Coren

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The Consumer Financial Protection Bureau is asking private lenders that provide student loans to ease penalties that borrowers face if their co-signer dies or files for bankruptcy.

Under current practices, if an "auto default" occurs for one of these reasons, the borrowers must either pay the full balance or risk having their credit ruined, The Washington Post reported.

This happens in the private student loan market, where loans come with high interest rates, and borrowers often need co-signers to secure the loan.

According to the consumer bureau, more than 90 percent of private school loans are co-signed. Of the 2,300 complaints that were filed with the bureau in the last five months, the primary problem borrowers reported was a default that occurred after their co-signer either died or declared bankruptcy. And this would happen even if the loan was being paid on time.

The consumer bureau is recommending alternatives for lenders to consider, such as allowing borrowers to find another co-signer, or release the co-signer from the agreement.

According to The Post, lenders will often agree to release a co-signer, if the loan payments have been made on time consistently, but some lenders require more than that, such as proof of graduation, transcripts, employment, salary, and sometimes credit checks.

Of the $1.2 trillion in student loan debt, $150 billion is from private loans. And private borrowers made up a majority of the complaints received by the bureau.
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