As many families know, private student loans often require a co-signer. This is, in part, because most college students lack enough significant credit history and income to establish the creditworthiness in the amount of a student loan. However, a recent study reveals a new risk with private student loan co-signing.
A consumer advisory from the Consumer Financial Protection Bureau, warns about certain bits of fine print. The upshot of these provisions? Private, co-signed loans “might also contain provisions that allow your student loan servicer to put you in default — even if you’ve been making your payments on time.”
The behavior of a co-signer affects the loan, even when all payments are made on time. Therefore, on some loans, a co-signer’s death or bankruptcy can change the terms on which a loan must be paid. Sometimes, this can cause instant default–even when the loans have been paid on time.
The question then becomes, how can one with a co-signed private loan mitigate against this risk? The CFPB notes that those who have paid according to schedule over a certain period of time (specified by the terms of the loan) can become eligible to release the co-signer’s obligations. This release can undo the aforementioned surprise default triggers. If you believe this might be a helpful path for you, there’s a suggested form letter from the CFPB that can be sent to your loan servicer.