Get cosigners off your student loans, now
You take out a private student loan, and after you graduate you faithfully make your payments, looking forward to the day when you're finally debt-free.
It would be a rude shock to discover your lender is suddenly demanding that you pay up, in full and right away, or be declared in default.
Yet that is precisely what could happen if your cosigner dies or files for bankruptcy, says a new report from the Consumer Financial Protection Bureau, which analyzed more than 2,300 student loan complaints and 1,300 debt collection complaints to reach its conclusion.
The good news: You might be able to protect yourself.
There's a couple of ways to go about this, but your first move — now — is to see whether you can have your cosigner released from the loan. Odds are good if you have a private student loan, you have a cosigner.
Look, we know private student loans aren't usually anyone's first choice, because they typically carry much higher interest rates and come with significantly less flexibility than do federally backed student loans.
Students can take out federal student loans on their own, with no need for cosigners in most cases.
But private student loans usually do require a cosigner. The few private student loans that don't absolutely require a cosigner often extend better interest rates to borrowers who have cosigners.
Cosigners are legally required to pay off the loan if the primary borrower can't or won't make the payments. If the cosigner — often a parent or grandparent — dies or declares bankruptcy, the lender can automatically put the loan into default, even if the primary borrower is otherwise in good standing and entirely up to date on payments.
That's a terrible problem if it happens to you, making a bad situation all that much worse.
The automatic default would make it difficult for you to take out other loans to pay for a car, a house or additional education. Potential landlords and employers may also check credit reports and deny a job or apartment if you have a default on your record.
What to do about the problem? There are multiple options.
- First, if the primary borrower's finances are in good order and the loan is current, ask the bank to release the cosigner and permit the primary borrower to continue paying back the loan on its original terms. If this doesn't work, you have two other options.
- Pay back the loan faster than required. Yes, this is easier said than done, and it doesn't directly address the issue, but it does create a smaller window of opportunity for trouble to occur.
- If the cosigner is a parent or grandparent, ask that person to leave a specific bequest, earmarked for loan repayment, in his or her will. Reshuffle other bequests as necessary, if leaving equal inheritances to children and grandchildren is important to you.
Some banks will release a cosigner after the primary borrower has made at least two years' worth of on-time, consecutive loan payments; others require longer runs of consecutive, timely payments.
Ask your lender for details about its policy on releasing cosigners, get the information in writing and plan to apply for a release as soon as the primary borrower is eligible.
The Consumer Financial Protection Bureau has posted sample letters for the primary borrower and cosigner to use in requesting a release from the bank.