The Consumer Financial Protection Bureau urged student loan borrowers today to get cosigner releases from their lenders to avoid surprise defaults.

The agency noted that some student lenders automatically demand the entire loan back soon after the death or bankruptcy of a parent, grandparent or other cosigner even if the borrower has never missed or been late with a payment. In addition to seeking immediate repayment, lenders sometimes go after the cosigners’ estates, according to the CFPD.

These automatic defaults can hurt credit scores, impeding the ability of the borrowers to get other loans and making it more challenging for them to get jobs with prospective employers and apartments from landlords who check their credit history, CFPB Student Loan Ombudsman Rohit Chopra said.

The number of cosigned, private student loans has risen dramatically, to over 90 percent in 2011 from 67 percent in 2008, as lenders have tightened their standards in the wake of the financial crisis.

Federal student loans rarely require a cosigner and when they do never lead to immediate default.

Some students have cosigners even when not required because this can result in lower interest rates.

Student borrowers have complained to the CFPB about lenders making releases difficult to obtain by not providing application forms on their Web sites nor revealing the minimum credit score necessary to be eligible to exempt the cosigner from the legal liability.

In appealing to lenders to get them to stop automatic defaults, the CFPB said ending this practice can help their bottom lines by reducing collection costs and sometimes allowing them to recover more of the principal over time than obtaining a one-time partial payment from the immediate demand.

The CFPB provided a sample letter that borrowers can use in asking lenders to release a cosigner. The agency also issued a sample letter a cosigner can use to ask to be removed.

 

 

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