Consumer protection agency warns about automatic defaults on private student loans


McClatchy Washington Bureau

The federal Consumer Financial Protection Bureau on Tuesday reported that some people who faithfully pay back their private student loans are being surprised with sudden "automatic defaults."

CFPB Student Loan Ombudsman Rohit Chopra said that the agency has heard from borrowers in good standing who suddenly have their loans placed in automatic default when the parent or grandparent who co-signed the loans dies or files for bankruptcy.

The default is serious because it harms a person’s credit rating and can make it impossible to get a mortgage or business loan, Chopra said.

CFPB director Richard Cordray said that lenders should have “clear and accessible processes in place to enable borrowers to release co-signers from loans.”

Richard Hunt, president and CEO of the Consumer Bankers Association, said in a statement that members of the association work with their customers with compassion in tragic circumstances. Hunt said it is common practice for student loan lenders to release cosigners from loan obligations if the student borrower dies or is disabled.

In addition, he said, “We are not aware of lenders accelerating the payment of a loan in good standing upon the death or permanent disability of a cosigner as a typical practice and believe it to be a rare occurrence.”

Chopra, however, said that the practice was mentioned in complaints to the agency. The problem was only with private student loans, not federal ones, he said. Federal student loans rarely require another person to sign on to a loan and when they do they do not lead to sudden defaults, he said.

The CFPB report said lenders can take steps to avoid pushing a private student loan borrower into default and demanding the entire loan balance when a co-signer dies or goes bankrupt. In some cases, the lender can determine that the borrower qualifies for a co-signer release.


Read more Politics Wires stories from the Miami Herald

  • Obama plays golf with ESPN hosts

    President Barack Obama is playing golf at a private club in Maryland with the hosts of ESPN's "Pardon the Interruption."

U.S. President Barack Obama speaks to the media, while meeting with El Salvador's President Salvador Sanchez Ceren, Guatemala's President Otto Perez Molina, and Honduran President Juan Hernandez, to discuss Central American immigration and the border crisis in the Cabinet Room of the White House Friday, July 25, 2014, in Washington.

    On border, Obama prods GOP while citing progress

    With one week left before Congress' August recess, President Barack Obama is prodding Republicans to help ease the influx of minors and migrant families from Central America, but with chances dimming that border legislation will reach his desk before the break, he also is focusing on other ways to stem the flow.

FILE - This July 24, 2014, file photo shows Speaker of the House John Boehner of Ohio, during a news conference on Capitol Hill in Washington. President Barack Obama’s request for billions of dollars to deal with tens of thousands of migrant children streaming across the border set off Democrats and Republicans. Lawmakers in both parties complained that the White House, six years in, still doesn’t get it when it comes to working with Congress.

    Lawmakers complain Obama too aloof with Congress

    President Barack Obama's request for billions of dollars to deal with migrant children streaming across the border set off Democrats and Republicans. Lawmakers in both parties complained that the White House — six years in — still doesn't get it when it comes to working with Congress.

Miami Herald

Join the

The Miami Herald is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere on the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

The Miami Herald uses Facebook's commenting system. You need to log in with a Facebook account in order to comment. If you have questions about commenting with your Facebook account, click here.

Have a news tip? You can send it anonymously. Click here to send us your tip - or - consider joining the Public Insight Network and become a source for The Miami Herald and el Nuevo Herald.

Hide Comments

This affects comments on all stories.

Cancel OK

  • Marketplace

Today's Circulars

  • Quick Job Search

Enter Keyword(s) Enter City Select a State Select a Category