Private student lenders reject 90 percent of co-signer release applications

CFPB received over 3,100 private student loan complaints between October 1, 2014 and March 31, 2015, which was a 34 percent increase over the previous reporting period. The agency also received approximately 1,100 debt collection complaints related to student loan debt during the six-month reporting period.

Many college students need a co-signer to qualify for private student loans if they are lacking credit history. Co-signed loans make up an increasing share of the private student loan market. In 2011, over 90 percent of private student loans were co-signed, often by a parent or grandparent.

Not only does the co-signer take on the responsibility to pay the loan in the event that the borrow defaults, but it can also cause difficulty or additional costs for the co-signer on their own credit.

The report notes that many lenders have “opaque policies related to the co-signer release benefit,” and most do not notify borrowers when they may be eligible to release a co-signer from a private student loan. Of those who did apply, the rejection rate was 90 percent.

The analysis of complaints submitted to the CFPB said private student loan companies often rejected applications because borrowers had previously accepted offers of postponing payment through forbearance, a policy that can permanently ban a consumer from seeking co-signer release for the life of the loan.

The CFPB reviewed the policies of a selection of private student loan companies, representing the majority of the market. Most contracts reviewed included “auto-default” clauses that place a loan in default when a borrower’s co-signer dies or files for bankruptcy, regardless of whether the account was in good standing.

The CFPB estimates that there are currently 8 million Americans in default on student loans.