While some people have no way to get a loan by themselves, having a co-signer can make your finances difficult, because, well, things get complicated when more people are involved. Among the 2,300 private student loan complaints sent to the Consumer Financial Protection Bureau, co-signed loans were a common source of headaches for borrowers.
I suppose “headaches” is putting it lightly — borrowers are finding themselves in “auto-default” if their co-signer (often a parent or grandparent) dies or goes into bankruptcy, no matter the standing of the loan. Sometimes these borrowers are prompted to immediately repay the balance upon the death or bankruptcy of their co-signer.
According to a report from the CFPB’s student loan ombudsman, this issue arises because lenders don’t make it easy for borrowers to release co-signers from the loan or find a new co-signer, if necessary. Additionally, borrowers don’t know what to do in this situation, which is why the CFPB issued a consumer advisory letting borrowers know how to deal with such events.
Considering that more than 90% of private student loans were co-signed in 2011, this is a significant issue. The CFPB hasn’t mandated lenders change their practices — the report merely describes “steps private student lenders could take before pushing the borrower into default and immediately demanding the entire loan balance upon co-signer death or bankruptcy.”
Whether or not lenders will act on this advice is unclear, leaving borrowers to take control of the situation. The CFPB released sample letters for how borrowers can release a co-signer or how co-signers can release themselves from loans, since lenders are apparently doing a poor job telling borrowers how they can do that. Obstacles frequently cited in complaints to the CFPB include strict, yet unclear, standards for releasing a co-signer; required release forms are unavailable online; and servicers are not proactively telling consumers the process for releasing a co-signer.
Co-signing a loan can be very risky, but it’s sometimes the only option for people to get the loans they need. Oftentimes, it’s the co-signer who has a lot to lose, considering the borrower can’t get credit alone, but both people are at risk.
If you’re considering co-signing a loan, be prepared to handle the worst-case scenario so you can avoid damaging your credit. Maintain constant communication with the borrower and closely monitor your credit reports (which you can do for free once a year) and credit scores to see how the loan impacts your credit standing. You can monitor your credit for free on Credit.com, where you can see two of your scores every month for free.
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