College students with private loans whose co-signer, often a parent or grandparent, dies or declares bankruptcy are often being forced to repay the entire remaining balance immediately.

Individuals caught in this situation include those in good standing who have kept up on their loan repayments, leaving federal regulators puzzled about why lenders are putting these people at risk of defaulting.

The Consumer Financial Protection Bureau (CFPB) says it received more than 2,300 private student loan complaints and more than 1,300 debt collection complaints related to student loans in one five-month period (October 1, 2013 to March 31, 2014).

Citing information from Rohit Chopra, the CFPB’s student loan ombudsman, The New York Times reported that some lenders are demanding immediate, full repayment following a co-signer’s death “more or less automatically, combing public records of deaths and bankruptcies, comparing them to loan records and generating repayment demands and default notices.”

“The ways in which they’re exercised don’t seem to be in the best interests of their companies or the best interests of the borrowers,” Chopra said. “It doesn’t seem that there is a thoughtful business decision.”

However, Chopra noted that these private student loans are used to back securities sold on Wall Street, raising the question of whether early repayment demands and default risks hurt or help these investments. It has been documented in the wake of the financial crisis that investors sometimes benefited from mortgage-based securities going under, depending on how they bet on their outcome.

Another issue is that borrowers are having difficulty getting a release of the co-signer requirement, even when that benefit was advertised before the loan is originated. Lenders often claim the co-signer can be released after the borrower makes a certain number of on-time payments. Instead, lenders often make it difficult to obtain such releases, or change the terms for a release after a borrower has met the original requirements.

It is estimated that Americans currently owe about $150 billion in private student loans.

-Noel Brinkerhoff

To Learn More:

Student Loans Can Suddenly Come Due When Co-Signers Die, a Report Finds (by Richard Perez-Pena, New York Times)

U.S. Agency Urges Private Lenders to Ease Automatic Default Rules on Student Loans (by Danielle Douglas, Washington Post)

Mid-Year Update on Student Loan Complaints (Consumer Financial Protection Bureau) (pdf)