About 90 percent of consumers are being rejected for co-signer release on their private student loans.
The finding is documented in the latest report from the Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman. The study also outlines problematic industry practices that may be disqualifying some consumers from securing a co-signer's release from their loans, potentially damaging both the co-signer and borrower's credit.
Co-signers can suffer from damage to their credit or be subject to higher rates on other forms of credit, while the borrower can become financially distressed if a company triggers and auto-default when a co-signer does or goes bankrupt.
While private student loans are a small portion of the overall market, they are generally used by borrowers with high levels of debt who also have federal loans. In general, private student loans carry higher interest rates and lack flexible repayment options, compared to federal student loans. Unlike other markets, independent data on the size and performance of the private student loan market is not available to investors and the public.
Most private student loans require a co-signer. A co-signer may help a borrower access credit or obtain a lower rate because they may be more creditworthy and can step in if a borrower is unable to repay.
The loan will appear on the co-signer's credit record and can affect their credit score if the loan is not repaid. If the borrower can't secure a release, the co-signer may have a more difficult time obtaining an affordable rate on other credit, making it more expensive to refinance a home or buy a car.
But borrowers can also be harmed by co-signers even if the loan is in good standing. If the co-signer goes bankrupt or dies, the borrower can be into default.
The report includes findings from the information requested from the industry as well as an analysis of more than 3,100 private student loan complaints and about 1,100 debt collection complaints related to student loan debt received between Oct. 2014 and March 2015.
The analysis found that companies rejected 90 percent of consumers who applied for co-signer release even though they advertised these options. Those that applied and had been denied were given little information as to why they were not eligible.
Despite last year's announcement from financial institutions to stop using auto-default clauses, the CFPB analysis found that most private student loan contracts continued to include them. Other harmful clauses included a way for a company to trigger a default if the borrower or co-signer is not in good standing on another loan with the institution that is unrelated to repayment history of the student loan.
The report found that company policies could permanently disqualify borrowers from a co-signer release if they are in good standing or required forbearance. When loans were sold to other Wall Street banks, borrowers were exposed to the practices of the new loan owner.
The report also identifies practices that could help borrowers and co-signers alike. The report called for improving transparency around co-signer release criteria and improving notifications for co-signer release eligibility.
The CFPB report notes that policymakers should consider whether auto-default, universal default, and other potentially harmful terms in the fine print of private student loan contracts are appropriate.
To help borrowers overcome obstacles to co-signer release, the CFPB published a set of sample letters for private student loan borrowers and their co-signers that they can send to the private student loan servicer. These letters instruct servicers to provide clear information about co-signer release policies.
CFPB Still Collecting Public Comments
The CFPB is still collecting public comments detailing how student loan servicing practices have made paying back student loans a stressful or harmful process for borrowers. The comment period is open until July 13. More information can be found here.
Student loans make up the nation's second largest consumer debt market. The market has grown rapidly in the last decade. Today there are more than 40 million federal and private student loan borrowers and collectively these consumers owe more than $1.2 trillion.