Students Default on Loans Over Obscure Provision

... even if they've been paying on time
By John Johnson,  Newser Staff
Posted Apr 22, 2014 1:05 PM CDT
Students Default on Loans Over Obscure Provision

Because the nation's student-debt situation wasn't enough of a mess: A new federal report warns that some students are going into default even when they've been paying back their loans on time, reports USA Today. It's because of an obscure provision covering private student loans—if the co-signer dies, the loan automatically goes into default, a development that can wreak havoc on a student's credit record, reports the Washington Post. The Consumer Financial Protection Bureau says it's been receiving a rising number of complaints about the issue. A typical example is when a parent or grandparent co-signs for the loan, but dies before it's paid off.

What's strange, points out the New York Times, is that this kind of automatic default doesn't seem to be in the best interest of the students or the lenders. "It doesn’t seem that there is a thoughtful business decision," says a CFPB official. The agency didn't have exact numbers, but the problem affects only private loans, and the vast majority of student loans are federal ones, which don't require a co-signer. Not that all is rosy on the federal front: The Wall Street Journal reports that critics are worried that increasingly popular debt-forgiveness programs are not only costing the government too much money but might be encouraging schools to raise tuition even higher. (More student loans stories.)

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