By Tim Devaney - 04/22/14 01:10 PM EDT
Federal regulators are investigating reports that lenders are pressuring college graduates to immediately repay their full student loan debt when a relative who co-signed the loans dies or files for bankruptcy.
The Consumer Financial Protection Bureau (CFPB) said Tuesday it is probing the phenomenon, which can damage the credit reports of borrowers who are otherwise in good standing.
"Private student loans can sometimes take many years to pay off, and these parents or grandparents may be unaware that their own financial distress or death can lead to a sudden default and demand for payment," said Rohit Chopra, the student loan ombudsman at the CFPB.
The CFPB reported it has received more than 2,300 complaints about private student loans over the last six months, many of which concern lenders' debt collection practices. One theme throughout the complaints was that, in some cases, lenders are collecting on student loans when a co-signor dies but the primary borrower is still alive and paying on time.
This has the potential to wreck college graduates' credit reports, Chopra said.
"Borrowers need to be aware that these defaults can seriously impair their credit profile, making it harder to buy a home, start a small business, and otherwise contribute to the economy," he said.
"That person may not pass an employment verification check when looking for a new job, since many prospective employers actually check credit reports," he added. "Many prospective landlords also now check credit reports to determine whether you're creditworthy to sign a lease. It, of course, impacts whether or not you will be able to qualify for credit and the price at which you would qualify for that credit for other types of loans."
Chopra said he is concerned the practice will continue if the agency does not step in.
"We do have some concerns that with an aging population and with very long terms on certain private student loans, that this could actually increase over time," he said.
The CFPB suggested that lenders allow borrowers to release their co-signors from their student loans, or give them time to find a new co-signor so they do not default on their student loans.
"But where we worry is that because we continue to see it over time and we're seeing it with more companies, this is something that can be really troublesome, to put it lightly, for a borrower, especially one who is just dealing with the loss of a parent," Chopra said.