New Bill To Protect Students From “Auto-Defaults” on Private Loans

If you have ever lost a parent, grandparent or sibling, you’ll know that on top of the pain of loss and grief, there are a thousand details that need to be addressed. But one of those details shouldn’t be your student loans.

The last thing that a borrower needs to have on their mind when someone close to them has passed away is how it will affect their student loans. Sadly though, many private student loan lenders do just that, adding headache on top of heartache.

In a report released last month, the Consumer Financial Protection Bureau revealed that many private student loan contracts have clauses that automatically accelerate loans into default upon the death of the cosigner or if the consigner files for bankruptcy. This is the case even if the borrower has been making on-time payments. In some cases, lenders have gone as far as to ask for the full, early repayment of the loan. Often times cosigners are parents, grandparents, or someone else who is close to the borrower. As of 2011, about 90 percent of private student loans had cosigners.

Loans are already stressful for students to manage after graduation. The repayment process can be confusing, and many lenders don’t provide an easy way for borrowers to access necessary information.

Take, for example, a cosigner-release clause. According the CFPB, many private loan lenders allow the borrower to apply for a release of their cosigner after a period of timely payments. This information would be incredibly helpful, but it isn’t always easily accessible to borrowers via lenders’ websites.

In order to help overcome these obstacles, Rep. Rick Larsen (D-Wash.) introduced a bill to offer private student loan borrowers better protections from “auto-defaults.” The Bereaved Borrowers’ Bill of Rights Act of 2014 would require loan companies to:

  • “offer borrowers a reasonable time period (at least 90 days), following the death or bankruptcy of a cosigner, to apply for cosigner release, identify a new cosigner, or refinance the loan before the company takes action to accelerate the loan or move it into default;
  • proactively advise students about their right to cosigner release when they are nearing eligibility;
  • provide an explanation and opportunity to correct when a borrower’s request for cosigner release is denied;
  • make the criteria for cosigner release clear, transparent, and easily accessible through company online service portals and websites; and
  • refrain from narrowing requirements for cosigner release as advertised at the time the individual took out the loan and offer cosigner release to borrowers with cosigners.”

“And to protect borrowers who have already established private student loan contracts, the bill would:”

  • “prohibit lenders from reporting an automatic default as a result of death or bankruptcy to credit reporting companies; and
  • prohibit credit reporting companies from including this information on their reports.”

Unfortunately, the high cost of college makes higher education unattainable for many students without taking out loans, either private or federal. Borrowers with private student loans face an even heavier burden because these loans generally have higher interest rates and fewer protections than federal loans. Larsen’s bill is a step toward ensuring that hardworking students who have earned their degree are treated fairly when repaying their loans.