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Consumer advisory: Co-signers can cause surprise defaults on your private student loans

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Today, we released a report that describes complaints we received related to the private student loan industry’s practice of placing borrowers in default even when their loans are current and in good standing. We’re also warning consumers that they can avoid surprise defaults by pursuing a co-signer release.

The vast majority of private student loans today have a co-signer (typically a parent or a grandparent). Having a co-signer can often lead to a lower interest rate, which can save you money in the long-term, because the co-signer will have to repay the loan if you don’t.

However, your loan might also contain provisions that allow your student loan servicer to put you in default — even if you’ve been making your payments on time.

That’s because your co-signer is also on the hook for your loan and therefore changes in their behavior can impact your loan, causing your loan to default and making your entire balance due all at once. We’ve received complaints that private student loan servicers are placing borrowers into default when their co-signer dies or files for bankruptcy.

Co-signer release

If you are a co-signer or have a student loan with a co-signer and you are in repayment, you should look into what’s called “co-signer release.” You should consider this option to avoid a surprise default. Both the borrower and co-signer can benefit from obtaining the release.

Many lenders advertise that a co-signer may be released from a private student loan after a certain number of consecutive, timely payments and a credit check to determine if you are eligible to repay the loan on your own. If your lender offers co-signer release, you will want to ask about this benefit and remove your co-signer as soon as you are eligible.

Unfortunately, many student loan servicers do not tell you when you are eligible to have your co-signer released, so you need to ask them how to do this.

To help you get started, we’ve put together sample letters you can edit and send to your student loan servicer. You can download sample letters to send by mail, or you can just cut and paste the text below into the “Send a Message” or “Contact Us” feature when you log into your account on the servicer’s website.

I want more information about how to obtain a release of my co-signer

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.

I am a co-signer, I want to be released

I am writing to request that I be released from my obligation to repay any loans associated with this account. Please conduct a review of this account and make a determination as to my eligibility to be released from my obligation.

If you determine that I am not eligible, please provide an explanation, including the following:

  • For what reason(s) am I ineligible for co-signer release?
  • What steps do I need to take to qualify for co-signer release?
  • What is your current co-signer release policy?
  • Do you anticipate modifying these requirements in the future? Will any future modifications apply to me when I seek to be released from this obligation?

If I am unable to exercise this option at this time, please update/annotate this account or accounts to reflect that I intend to do so as soon as possible. Please contact me at the point-in-time at which I am eligible for co-signer release.

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.

We also have other sample letters you can send to your student loan servicer to give payment instructions and others you can send to a student loan debt collector.

Remember, if you’re having a problem with a student loan, you can submit a complaint online or call us at (855) 411-2372.

If you have questions about repaying student loans, check out our Repay Student Debt tool to find out how you can tackle your student loan debt.

Rohit Chopra is the CFPB’s Student Loan Ombudsman. To learn more about our work for students and young Americans, visit consumerfinance.gov/students.

  • truth

    These loans should be outlawed. They carry the harshest penalties in the entire world.

    • Anthony Caputa

      Student Loans? Do you mean Pay Day Loans?

  • Nick

    Been there done that with Wells Fargo. Was denied, even with a great credit score but, it was due to my debt to income ratio. Even tried to refinance (which is just re-consolidating) with the same cosigner but was also denied and was required to add another cosigner, so I decided not to refinance. So much for so called options.

  • Consumer and a Lender

    Much of the legislation that ways rolled out under Dodd Frank is just hurting consumers in many ways. Financial institutions are tied to government underwriting rules and documentation making it much tougher to originate loans. Of course, the consumer thinks it is the bad banks however, it really is the government stepping in controlling the banks and lending rules. It is ultimately a double edged sword. Think about it if you were a CEO of a company- would you want the government to tell you what you can and can’t do and who can do business with? The fact is that our society has this entitlement attitude and what can my government do for me. At the end of the day be careful what you want your government to give you and “do” for you as it comes with strings. Yes there was unethical behavior in investments and lending during the boom, but really is our government handling things in an ethical behavior in many aspects of what they do.

  • mara

    Just wanted to point out a problem with these sample
    letters; sending a letter to the “[Payment
    Address on Your Bill]” will only end up in delaying the letter getting to
    the lenders. Most servicers use payment processors or at least separate
    PO Boxes for payments so that payments are processed as quickly as
    possible. The sample letters should say to send the letters to the
    “correspondence” address. If none is provided, then the default
    address should be the “[Payment
    Address on Your Bill].”

  • Ed McKinley

    I really think you guys should post my prior comment. Censorship is so un American.

  • Doris Thomas

    Miss Doris Thomas is seeking financial restitution from the US Department of Education, Egg Harbor Township BOE , American Education Services, PHEAA, and US Department of Justice! I am seeking an appointment with the Student Loan Ombudsman, Rohit Chopra and Mr. Eric Holder from the Justice Department!

  • http://creditspoint.com/ CreditsPoint

    Never co-sign a student loan or take out a student loan unless a reasonable business plan has been prepared. That plan would include an
    assessment of the major, time spent studying, chance of employment (including letters from future employers as to the demand for the
    major), budget during school and budget post graduation, why a particular school would be better or worse post graduation, party inclinations as well as self discipline and schedules based on past history and more. Also, terms of a loan including the fine print is pretty imperative as part of due diligence.

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