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Posted: 6:00 a.m. Thursday, April 24, 2014

Private Student Loans Can Go Into Automatic Default

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By Clark Howard

Picture this: You're paying on your student loan as agreed and suddenly your grandparent or parent who co-signed the loan dies.

Do you get a temporary forbearance or a note of condolence from the lender? No. According to the Consumer Financial Protection Bureau, you're told the entire loan is now in automatic default.

If you can't immediately pay the balance in full, the lender can ruin your credit, have your checked garnished, and even take your tax refund -- even though every payment you've made has been on time.

It's just the latest ugly story to emerge from the world of private student loans, the lion's share of which are financed by Citigroup, JPMorgan Chase, Wells Fargo and Discover Financial Services.

Private student loans commonly contain a clause that lets the lender call the loan due in full if the co-signer -- often a parent, but more commonly a grandparent -- either dies or declares bankruptcy.

The CFPB is recommending people in private student loans try to get a release for their co-signer before something like this happens. They have a series of sample letters to help you get the job done.

I've long been outspoken about the dangers of private student loans. Now you can add this latest danger to the list.

The best advice is to stay out of harm's way to begin with. Here's my rule: When borrowing for college, be sure to max out whatever federal loans you're offered. Should your college expenses exceed your level of federal loans, consider going to a cheaper school, picking up extra work, or whatever else you have to do to avoid private student loans at all cost.

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