April 22, 2014 / 4:01 AM / 6 years ago

Students struggle when loan co-signers die, go bankrupt -watchdog

WASHINGTON, April 22 (Reuters) - The U.S. consumer financial watchdog warned on Tuesday that some student loan borrowers could be thrown into default if relatives who co-signed their loans die or declare bankruptcy.

The Consumer Financial Protection Bureau said in a new report published on its website that many private student lenders stipulate that the balance of a loan will come due if a parent, grandparent or other co-signer becomes unable to share responsibility for the loan.

This means the borrower may be automatically put into default, even if he or she has been making payments on time up to that point, the bureau said.

“Borrowers need to be aware that these defaults can seriously impair their credit profile, making it harder to buy a home, start a small business and otherwise contribute to the economy,” said Rohit Chopra, the bureau’s student loans ombudsman.

He said the report was based on complaints submitted by borrowers, and regulators do not know how common automatic defaults are in the broader private student loan market.

Richart Hunt, chief executive of the Consumer Bankers Association, said in an emailed statement that his group had not heard of lenders placing borrowers into default when their co-signer died or declared bankruptcy and thought it was likely a rare occurrence.

Tuesday’s report is the latest in a series of incremental efforts by the consumer bureau, which was created by the 2010 Dodd-Frank law, to shine a light on potential pitfalls in the private student loan market.

The bureau has declared its intention to supervise the biggest student loan servicers. It also has highlighted differences between private loans and more carefully regulated government-backed student loans.

Federal loans almost never require another person to sign on, Chopra said. In contrast, more than 90 percent of private loans in 2011 were co-signed by parents, grandparents or others.

While regulators do not know how common automatic defaults are, Chopra said, the bureau heard about the problem from borrowers at various stages of paying back their loans.

Borrowers should check with their lenders to see if they can release their co-signers from responsibility, the report said. Many creditors say they allow this, but borrowers still have found it difficult to get parents or grandparents released, Chopra said.

The report said lenders should review their own policies as well. Placing responsible borrowers into default could cause creditors to lose out on income from interest paid on the loans, or it could damage their reputations, the bureau said.

“It seems that private student lenders and servicers may not always be acting in their own self-interest by accelerating balances and placing loans in default,” the report said.

The report also suggested lenders allow borrowers to find a new co-signer in times of turmoil, or give them time to apply for a new loan or refinance the old one. (Reporting by Emily Stephenson; Editing by Steve Orlofsky)

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