Some private student loan borrowers whose co-signers die are facing automatic default, even if their loans are in good standing, the U.S. Consumer Financial Protection Bureau said in a report.
The consumer bureau, which oversees private student loans, outlined the practice today in releasing a midyear report on student-loan complaints.
The federal agency received more than 2,300 private-loan and more than 1,300 debt-collection complaints between October 2013 and March 31 of this year, according to the report. Issues with co-signers, often a parent or grandparent, have “routinely emerged” as areas of concern, the agency said.
Many private loan contracts include options for lenders to demand the full balance when a co-signer dies or files for bankruptcy, according to the report. While the agency can’t quantify how often the problem is occurring, it suggested ways to protect borrowers such as releasing co-signers.
“It could grow in number and potentially be a prevalent issue,” Rohit Chopra, the CFPB’s student loan ombudsman, said on a call with reporters. “This can be really troublesome for a borrower, especially one dealing with the loss of a parent.”
The majority of the $1.2 trillion in student-loan debt, about 85 percent, is federal loans made to students or their parents. Federal student loans don’t require a co-signer.
The CFPB was created by the 2010 Dodd-Frank Act to protect consumers from abuses related to financial products including student loans. The act required the agency and the Education Department to report on the private loan industry.