The vast majority of consumers ? 90 percent ? are being rejected for co-signer release on their private student loans, according to a recent report by the Washington-based Consumer Financial Protection Bureau, which found ?that the broken co-signer release process is leaving responsible consumers at risk of damaged credit or auto-default distress.?
When student borrowers and co-signers seek a co-signer release on a private student loan but are unable to obtain it, the co-signer can suffer damage to his or her credit report or be hit with higher rates on other forms of credit, such as car loans and mortgages. It also can cause financial problems for the primary borrower if a co-signer dies or goes bankrupt and the lender triggers an auto-default.
?Parents and grandparents put their financial futures on the line by co-signing private student loans to help family members achieve the dream of higher education,? said Richard Cordray, CFPB director. ?Responsible borrowers and their co-signers should have clear information and standards for releasing the co-signers if the time is right.?
Many private student lenders advertise options to release a co-signer from a student loan. However, an analysis of industry responses to the CFPB information request found that lenders and servicers granted very few releases, with 90 percent of borrowers who apply rejected. The CFPB also found that consumers have little information on the specific criteria needed to obtain a co-signer release.
Student loans make up one of the nation?s largest consumer debt markets. Federal and private student loan borrowers collectively owe more than $1.2 trillion. In general, private student loans carry higher interest rates than federal student loans and lack the flexible repayment options that federal student loans have. Neither private nor federal student loans can be discharged in a bankruptcy filing.
Most private student loans require a co-signer to access credit or obtain a lower rate because they may be more creditworthy and can step in to make payments if a borrower is unable to pay. While co-signers were less often required during the years before the financial crisis, a report on private student loans by the CFPB and the Department of Education in 2012 found that by 2011, more than 90 percent of new private student loans were co-signed, often by a parent or grandparent.
?The CFPB report did not analyze why all consumers are denied or approved,? according to a CFPB representative. ?We expect some must be rejected for sound reasons.
?Rather we flag that a very high rate are being denied and the problematic policies and practices of companies may be contributing to this rate, and consumer confusion around whether they are eligible for co-signer release, and why they may have been denied.?
The report made some recommendations for improving the private student loan industry?s co-signer practices, such as increasing the transparency around the availability of co-signer release, including what specific requirements exist that a borrower needs to meet to obtain a release. They also could notify borrowers when they meet prerequisites for releasing a co-signer, such as making a certain number of on-time payments.