Grieving Borrowers Told to Repay Student Loan

Washington (ap) — Some student loan borrowers who had a parent or grandparent co-sign the note are finding that they must immediately pay the loan in full if the relative dies. The Consumer Financial Protection Bureau says lenders have clauses in their contract that explain this could happen, but many borrowers are not aware of them.

The agency’s ombudsman, Rohit Chopra, said complaints related to this issue are growing more common because the practice is catching so many consumers by surprise. Chopra said the practice has affected borrowers not just when the co-signer has died, but when the co-signer has declared bankruptcy.

“We do have some concerns that with an aging population and with very long terms on certain private student loans, that this could actually increase over time,” Chopra said.

The issue doesn’t affect federal student loans, which are more commonly issued than private student loans. In the private loan industry, 90 percent of loans were co-signed in 2011, and having a co-signer can often lead to a lower interest rate, the bureau said in its report.

Richard Hunt, president and CEO of the Consumer Bankers Association said in a statement that its members work with their customers “carefully and compassionately” and it is common practice for the lenders to release co-signers from loan obligations.

Chopra, however, said even as many financial companies advertise the ability to release a co-signer from a loan, they make it complicated to do so.

The report said the practice might occur because some lenders rely on third parties that automatically trigger a default “regardless of individual circumstances.”