Risks of Student Loan Default if Using Co-Signer

By CNN News Wire

Published 04/23 2014 06:51AM

Updated 04/23 2014 07:02AM

Student loan bills can pile up quickly. So when it comes to paying them, many people rely on their parents or grandparents to co-sign the loan.
But if something happens to them, the student could be forced into default.

It sounds like a nightmare.  Your mom or dad has co-signed your student loan, and then something terrible happens to them... Bankruptcy, or worse, death.

Then, you get a letter in the mail saying the loan, the full amount, is due.... immediately.

If you can't pay it, you go into default.  Your credit score is temporarily ruined. And you're getting a barrage of debt collection calls.

That's exactly what's happening to some people, according to the Consumer Financial Protection Bureau

The government's consumer watchdog discovered these so-called "auto defaults" after it sifting through thousands of debt collection complaints.

It's a big issue for students because most private student loans are co-signed.

And when something happens to that person, the bank thinks the loan can't be paid back, regardless of whether or not the student can pay.

Usually, the contract's fine print says an auto-default is a possibility.

To avoid it, the student should ask the bank to take the co-signer off the loan, if something happens to them.

But you might have to jump through some hoops like a new credit check, or make several months of on-time payments.

(Zain Asher, CNN)

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