Alert: Terrible And Somehow Legal Private Student Loan Provision

Well this is very uncool, via the NYT: “Student Loans Can Suddenly Come Due When Co-Signers Die, a Report Finds.”

The problem, described in a report released Tuesday by the Consumer Financial Protection Bureau, arises from a little-noticed provision in private loan contracts: If the co-signer dies or files for bankruptcy, the loan holder can demand complete repayment, even if the borrower’s record is spotless. If the loan is not repaid, it is declared to be in default, doing damage to a borrower’s credit record that can take years to repair.

The bureau said that after a co-signer’s death or bankruptcy, some borrowers are placed in default without ever receiving a demand for repayment. The agency did not accuse loan companies of doing anything illegal.

Rohit Chopra, the bureau’s student loan ombudsman, said that he did not know how common the practice was, but that a steady stream of consumer complaints indicated it was becoming more frequent. He also said companies appeared to be doing it more or less automatically, combing public records of deaths and bankruptcies, comparing them to loan records and generating repayment demands and default notices.

Sallie Mae, the largest provider of private and public student loans, did not respond for comment, if you can believe it.

According to the article, after you graduate and get a few years of credit history under your belt, you can get your co-signer removed from the loan and have it in your name only, or you can choose a new co-signer altogether. If you have private student loans co-signed by your parents, this is probably worth looking into.

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