The CFPB released a report on Tuesday that revealed having a co-signer on a student loan may inadvertently allow a student loan servicer to put the borrower into default, even if payments have been made on time.
According to the report, approximately 90 percent of private student loans had co-signers in 2011—a practice that may allow borrowers to obtain lower interest rates.
While many private student lenders provide an option to release a co-signer from a loan after a certain period of on-time payments, consumer complaint data showed many borrowers encounter difficulty when obtaining the releases.
“[C]omplaints indicate that borrowers often have to apply for a release, but lenders and servicers generally do not make the criteria for co-signer release clear and transparent,” the report said. “For example, consumers note that required forms are often not available on websites or in an electronic form. In addition, consumers’ complaints suggest that servicers do not seem to be proactively notifying consumers about the specific requirements to submit a request for a release.”
The CFPB also said it has received complaints related to how co-signed loans are treated when the co-signer dies or files for bankruptcy.
“Some consumers assume that death of a co-signer will result in a release of the co-signer’s obligation to repay,” the report said. “In many cases, consumers report that student loan servicers are reporting… defaults to credit bureaus, negatively impacting the credit profile of a borrower who was otherwise paying on time, potentially making it more challenging to pass employment verification checks and access other forms of credit.”
The CFPB ombudsman said in the report that student loan servicers should provide “opaque policies” related to the borrower’s obligations and options.