Today the Consumer Financial Protection Bureau released some startling information about student loan complaints that they have received. Among the most troubling was that many borrowers are reporting that lenders have put loans that were current directly into default when the co-signer dies or declares bankruptcy. The scary part about thees complaints and this practice is that it is perfectly legal. The good news is that the CFPB has come up with a clever idea to help you avoid the dreaded “accelerated default” if your co-signer dies.
Here is an example of how this could play out:
Suppose you needed a private loan to pay for a couple years of college. Because you didn’t have the credit needed to get the loan on your own, you had a parent co-sign. Let’s say you graduate college and make timely payments for five years and your loan is halfway paid off. If your co-signer parent passes away or has to declare bankruptcy, your lender could immediately place your loan into a default status. This means that they would expect the payment due in full or nothing else. It also means that they report the default to all the credit agencies… which would destroy any decent credit score. Thus, not only would you be grieving the loss of a parent, your credit would be destroyed, and you would have a huge bill that might be impossible for you to pay off.
Why would a lender do this?
According to the full text of the CFPB report, borrowers “submitted complaints describing how debt collectors threaten to place liens on property or other assets if the decedent’s family members or estate administrators do not immediately pay the loan in full.” Roughly translated, it means that the lenders are using the death of a loved one as opportunity to get the loan paid off in full. If a parent or a grandparent dies, lenders are trying to get their money before any family member gets their inheritance.
Who could be affected?
With over 90% of private loans involving a co-signer, the reality is that most private borrowers could be subjected to this outcome. While the CFPB report does not specify which lenders are using this tactic, they indicate that it is not limited to just one or a few companies. At this juncture, its impossible to know unless you or your attorney read the full text of all your private loan contracts.
What can be done to prevent my bank from defaulting my loan if my co-signer dies?
The CFPB’s report and analysis has scored some major points with this writer, but perhaps the most impressive part of their work was the CFPB blog article on the subject. In their article they discussed ways borrowers can be proactive in avoiding a default in the event of a co-signer death. Specifically, they suggested looking into a co-signer release program by sending a letter or an email to lenders with the following message:
I am writing to you because I am seeking the release of my co-signer on my loan. Please conduct a review of my account to determine if I am eligible for co-signer release.
If you determine that I am not eligible to have my co-signer released from my loans, please provide an explanation, including the following:
- What is your current co-signer release policy?
- For what reason(s) am I ineligible for co-signer release?
- If I am not eligible for co-signer release now, when will I become eligible?
- What steps do I need to take to qualify for co-signer release?
- Do you anticipate modifying these requirements in the future? Will any future modifications apply to me when I seek to release my co-signer?
If I am unable to exercise this option at this time, please update/annotate my account to reflect that I intend to seek co-signer release as soon as possible. Please contact me at the point-in-time at which I am eligible to have my co-signer released.
In addition, if you are unable to provide any of the information or documentation I have requested or otherwise cannot comply with this request, please provide an explanation.
Thank you for your cooperation.
This idea is great for several reasons. First, getting your co-signer released from the loan is great for their credit score and a great way to thank them for helping you pay for college. Second, having your co-signer removed from the loan eliminates the possibility of your loan going into default if they die.
Finally, if thousands of lenders across the country send out the same email/letter with the exact language from the CFPB, it may force the hand of the lenders. Suppose a company is engaging in this “accelerated default” practice. If enough people are sending the same email/letter, it will be apparent that the CFPB has gotten the word out. Because these companies value their bottom line above everything else, they may decide that the bad press and potential lost business could be worse than they money they would make by enforcing these terms.
Start a movement!
The more people who send this email/letter, the bigger effect it will have on the lenders. Also, people who are successful in getting their co-signers released can avoid the risk of the dreaded “accelerated default”.