DANGERS OF AUTOMATIC DEFAULT: STUDENT LOAN PROBLEMS FOR BORROWERS AND CO-SIGNERS

Student loan borrowers and their co-signers are often in for a surprise if the co-signers become ill or declare bankruptcy. These unforeseen circumstances can have significant effects on a student loan borrower’s account and credit history. It is a common practice for lenders to require co-signers for contracts that bestow benefits upon young adults. The primary reason for requiring co-signers is that most young adults do not have a well-established credit history, sufficient funds in their bank account to cover liabilities or assets that may be taken as collateral to cover liabilities. Co-signers are a method of insurance and risk minimization to the lenders. This method allows lenders a second person to collect from in the event that the principal borrower does not fulfill his or her obligations.

Often, the co-signer is a parent or grandparent of the young adult who is taking out a loan. By co-signing, the co-signer is agreeing to be legally responsible for fulfilling the principal borrower’s (or young adult’s) contractual duties in the event that the principal borrower fails to perform under the terms of the contract. When it comes to student loans, private lenders typically require a co-signer. Some federal loan programs, such as the Parent PLUS loan program, even require a parent or grandparent co-signer. Without the co-signers, the young borrowers will likely have their applications for financial aid denied and will be unable to pay for tuition at the university or trade school they wish to enroll in.

Hidden dangers of these types of loans are lurking in the fine print of many of these contracts. Some student loan contracts contain an “auto-default” clause. Auto-default clauses provide instances where the student loan will automatically be considered in default status. When a loan is in default status, the entire balance of the loan automatically becomes due and the lender may demand full payment for the entire amount of the loan. Most borrowers and co-signers are completely unaware that the student loan contracts they may be entering into have auto-default clauses that come into effect when the co-signer dies or files for bankruptcy. Even if the borrower has made every payment on their repayment schedule in full and on time, the death of a parent or grandparent or a bankruptcy by the co-signer can wreak havoc on an unsuspecting borrower. Default status immediately harms the borrower’s credit score.

Student Loan Law Group recognizes that many borrowers do not read or understand the fine print on every page of a thick contract. Student Loan Law Group consists of licensed attorneys who fight to protect borrowers’ legal rights. Borrowers who are in default or believe they are facing default are encouraged to take immediate action to become informed of their rights and to hire counsel if needed to protect those rights.

Borrowers seeking additional information regarding student loan debt management or student loan default may contact Student Loan Law Group by visiting the website at www.StudentLoanLawGroup.com or by calling 888-843-1706888-843-1706 FREE.