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Some private student loans auto-default when co-signer dies

Last week, we mentioned how as the cost of higher education has soared in the United States, many parents and grandparents have offered to help their children or grandchildren pay the cost of tuition. One way parents and grandparents are doing this is by co-signing private student loans.

However, the Consumer Financial Protection Bureau recently reported that some private student loan borrowers have been shocked when their loans automatically default and they become responsible for paying the loan amounts in full after their co-signer parent or grandparent passes away.

The CFPB said that many borrowers are unaware of the clauses within the loan agreements that allow lenders to accelerate the payment of a loan when the co-signer dies or even declares bankruptcy (more on that in the next post).

The CFPB ombudsman said many private student loan providers advertise a release option for co-signers, but the process is often complex. Additionally many lenders work with third parties that default loans automatically, "regardless of individual circumstances," the CFPB reported.

"We do have some concerns that with an aging population and with very long terms on certain private student loans, that this could actually increase over time," the CFPB ombudsman said.

The ombudsman indicated that some borrowers who have complained about the practice were up to date on loan payments before their loans were thrown into default and they were told that the full loan amount was due.

For individuals who still have tens of thousands of dollars of student loan debt to pay off, the request is impossible. Credit damage and frequent calls from debt collection agencies can also begin as soon as the loan enters default status.

Student loan debt is a major problem for many individuals in Wisconsin and elsewhere. The problem can become much worse and immediate if the loan goes into default and the lender demands payment in full.

Working with an experienced bankruptcy lawyer can help to evaluate the situation, work with the lender and come up with a plan for dealing with the student loan debt before it gets even more out of hand. The CFPB also has information for borrowers on releasing their co-signers in its report.

Source: New Jersey Herald, "Grieving borrowers told to repay student loan," Kimberly Hefling, April 22, 2014

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