Legal Protections for Borrowers With Private Student Loans

On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) into law. The most frequently-mentioned part of the law rolled back regulations that the Dodd-Frank Act imposed on banks. But other parts of S. 2155 provide legal protections to borrowers who have private student loans.

Specifically, the law:

  • prohibits a private student loan lender from declaring a default or accelerating a private student loan if a cosigner files bankruptcy or dies, and
  • requires a lender to release cosigners from having to repay the debt if the borrower dies.

Also, under the law, a borrower who rehabilitates a private student loan may ask the lender to remove a reported default from the borrower’s credit report.

When a Lender Can’t Call a Loan Due

The Economic Growth, Regulatory Relief, and Consumer Protection Act amends the Truth in Lending Act in two ways as of November 20, 2018: to prohibit automatic defaults due to the bankruptcy or death of a cosigner, and to require a lender to release a cosigner from the debt obligation if the borrower dies.

Prohibition on automatic defaults after a cosigner's bankruptcy or death. Private student loan lenders can't automatically declare a private student loan in default or accelerate the debt (call it immediately due) solely because a cosigner files for bankruptcy or dies. (Basically, the law bans “auto-default” clauses. An auto-default clause is a clause that gives the lender the ability to demand full repayment of the loan immediately in certain circumstances, like upon a cosigner’s death, even if the account is in good standing.)

Mandatory release of a cosigner upon a borrower’s death. The law requires a private student loan lender to release a cosigner from the obligation to repay the student loan if the student borrower dies. The lender has to release the cosigner within a reasonable time frame after getting notice about the borrower’s death.

Removing a Default From Your Credit Report

The Economic Growth, Regulatory Relief, and Consumer Protection Act also amended the Fair Credit Reporting Act. Now, after successfully finishing a loan rehabilitation program, a borrower may ask the lender to remove information about the default from the borrower’s credit report.

The borrower may rehabilitate and ask the lender to remove the default only one time per loan.

Downsides to Rehabilitating a Private Student Loan

While this law could theoretically help you improve your credit report, it could also potentially lead to abusive behavior from private student loan lenders and debt collectors. Here’s how. The law doesn’t actually require the lender to remove the default from the borrower’s credit report upon request, nor does it require payments under the rehabilitation program to be reasonable or affordable. (Rehabilitation programs for federal student loans, on the other hand, must offer reasonable and affordable payment plans.)

So, a lender might convince a borrower to make payments under a rehabilitation plan—even after the statute of limitations for the loan has expired—without guaranteeing that the plan will be sustainable or that the lender will remove the default from the borrower’s credit report. Making one or more payments under a rehabilitation program will likely revive the limitations period and, if the borrower defaults again, the lender could sue. (To learn more, see Is there a statute of limitations for private student loans?)

Getting Help

If you have questions about the statute of limitations for your private student loans, need help working out a settlement or other repayment option for your private student loans, or have questions about whether rehabilitating a particular loan is a good idea, talk to a lawyer.

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