A new report released Tuesday by the Consumer Financial Protection Bureau says some student loan borrowers who had a parent or grandparent co-sign the note are being pushed into default if the relative dies or files for bankruptcy.
Even when the private loans are being repaid on time, some borrowers are placed in default and told to pay the loan in full right away because their co-signer can no longer support them financially, according to the CFPB report.
The agency's ombudsman, Rohit Chopra, said complaints related to this issue are increasing because many borrowers are being blindsided by the practice.
"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," Chopra was quoted by The Associated Press as saying.
The issue does not affect federal student loans, which are more commonly issued. In 2011, 90 percent of students took out private loans had a cosigner with them. The CFPB reports that leads to a lower interest rate.
According to the CFPB, lenders do have this clause in their contracts.
Richard Hunt, president and CEO of the Consumer Bankers Association, responded in a statement saying that its members carefully work with their customers and it's common for lenders to release co-signers from loan obligations.
"We are not aware of lenders accelerating the payment of a loan in good standing upon the death or permanent disability of a co-signer as a typical practice and believe it to be a rare occurrence," Hunt said.
Many creditors say borrowers should check with their lenders to see if they can release their co-signers from obligation, but Chopra said they make it difficult to do so. The number of complaints the agency received weren't specified.
The issue may occur due to lenders relying on third parties that automatically trigger a default "regardless of individual circumstances,” the reports said.
"While these acceleration options may have a legitimate business purposes, it seems that private student lenders and servicers may not always be acting in their own self-interest by accelerating balances and placing loans in default," the report said.