The Consumer Financial Protection Bureau has released a report outlining widespread servicing failures reported by both federal and private student loan borrowers. Consumers describe companies using various sloppy, patchwork practices that create obstacles to repayment, raise costs and contribute to further harming struggling borrowers.
The CFPB has made it a priority to take action against companies that are engaging in illegal servicing practices and some of that work is addressed in a new report, which can be found at: http://www.consumerfinance.gov/f/201509_cfpb_student-loan-servicing-report.pdf
There are nearly 8 million federal and private student loan borrowers in default, representing more than $110 billion in balances, according to the CFPB. Millions more are falling behind and may need additional support from servicers to understand and access repayment options. The CFPB believes many companies may not be investing in the resources necessary to service large numbers of delinquent loans.
"With one out of four student loan borrowers struggling to repay their loans or already in default, cleaning up the servicing market is critical," said CFPB Director Richard Cordray. “[The] report underscores the need for market-wide student loan servicing reforms to halt harmful practices and boost assistance for distressed borrowers."
The CFPB said it intends to explore potential industry-wide rules to increase borrower protections.
In May, the CFPB launched a public inquiry into student loan servicing practices. The CFPB also sought input on potential solutions to improve service for student loan borrowers in repayment. In response to the public inquiry, the CFPB received more than 30,000 public comments, which informed recommendations in the new report.
Student loans make up the nation’s second largest consumer debt market, which has grown rapidly in the last decade. The total volume of outstanding student loans has more than doubled, rising from less than $600 billion in 2006 to more than $1.2 trillion. One in four student loan borrowers are currently in default or struggling to stay current on their loans, despite the availability of income-driven repayment options for the vast majority of borrowers.
Servicers manage borrowers’ accounts, process monthly payments and communicate directly with borrowers. When facing unemployment or other financial hardship, borrowers must contact student loan servicers to enroll in alternative repayment plans, obtain deferments or forbearances or request a modification of loan terms. Millions of student loan borrowers reported problems such as servicers losing paperwork or misapplying payments. Borrowers say that when errors arise, they find it difficult to have them corrected. Many federal and private loan borrowers report serious problems accessing affordable repayment options or other repayment alternatives.
Some of the key issues reported to the CFPB include:
Servicing failures may contribute to millions of distressed borrowers defaulting: The U.S. Department of Education offers numerous plans to borrowers with federal student loans to make payments more affordable. These include options that let borrowers set their monthly payment based on their income. According to a recent study, 70% of the federal Direct Loan borrowers in default met the income requirements for lower monthly payment under an income-driven repayment plan. This raises serious concerns that millions of borrowers may not be receiving important information about repayment options or may encounter breakdowns when attempting to enroll.
Borrowers report servicers steering them into forbearance or other short-term options that, while appropriate for some borrowers, may increase costs and may not be in the consumer’s best interest. Others told of servicers providing conflicting or inaccurate information, preventing them from accessing tools to avert default.
- Sloppy practices boosting costs and causing distressed borrowers to lose critical protections: Consumers enrolled in an income-based repayment plan must recertify for the program on a yearly basis. Recent data sources suggest that three in five borrowers in income-driven repayment plans do not recertify on time although they are eligible. Borrowers report that inadequate renewal notices can contribute to the missed deadlines. Many consumers in these repayment plans also report unexpected payment spikes and interest charges due to servicer delays around the recertification process. Others reported that servicers recommended alternative short-term payment programs, such as forbearance, that may be more expensive over time.
- Debt relief scams targeting distressed borrowers: Problems with servicing can leave distressed borrowers without the tools to help them avoid default. Student debt relief scams prey on these borrowers, charging up-front fees while promising to enroll borrowers in free federal consumer protections, including income-driven repayment plans.
The CFPB’s report also provides insights into how certain student loan servicing practices may be causing borrower harm. These issues include: costly surprises and runarounds; lack of assistance for struggling borrowers; and setbacks for older Americans, military borrowers and consumers with disabilities.
Consumers with federal and private student loans report a range of problems around servicers making mistakes, records getting lost, payments being processed too slowly, or servicer personnel not having the latest information about a consumer’s account. Borrowers report that these issues include:
- Poor customer service and bad information causing borrowers distress: Borrowers report problems accessing basic account information, receiving conflicting information about repayment programs and loan features, and receiving inaccurate billing statements. When errors occur, borrowers report problems getting them resolved and a lack of recourse. Bad information can lead to missed payments, lost benefits and other breakdowns that can damage borrowers’ credit and make student debt more expensive.
- Servicing transfers leading to surprise fees and lost benefits: More than 10 million borrowers have had their servicer change in the past five years. Consumers and industry report, however, that servicing transfers can create confusion when companies have different policies and procedures related to payment posting, allocation and processing, as well as the administration of certain borrower benefits. When servicers change, payments may be lost, consumers may incur surprise late fees and processing problems and missing account records can knock borrowers off track on repaying their loans.
- Roadblocks to refinance keeping borrowers tied to high-rate loans:Borrowers seeking to refinance student loans often depend on their current servicer to provide accurate and timely information about how to pay off their student loans. Public comments from borrowers and from student loan refinancing companies describe payoff problems, including inaccurate payoff statements, surprise bills demanding extra payments and customer service confusion that increases costs for borrowers, lenders and servicers.
- Co-signer policies causing auto-defaults and borrower distress: Private student loan borrowers continue to report serious financial distress when a company unexpectedly puts their loan in default status. These borrowers report paying on time each month, only to discover that their loan has been placed into default and sent to a debt collector following the death or bankruptcy of a co-signer, causing damage to their credit.
- Payment processing practices increasing fees and penalizing borrowers: Borrowers expect servicers to process monthly payments and apply them to the loans in their account correctly, in a timely manner and without needlessly increasing costs. Borrowers report being surprised that some servicers allocate payments in ways that maximize costs and fees. For borrowers trying to get ahead by paying more than they owe, these practices can increase interest charges and make it take longer to pay back a student loan.
The CFPB’s report includes several recommendations:
Create consistent, industry standards for the entire servicing market: While student loan servicing is subject to a number of state and federal laws, the market lacks consistent standards that cover the servicing of all private and federal student loans. Currently there is a patchwork of student loan servicing practices across the market, which includes loans held by private investors, banks and the federal government. Although the terms of these products can vary, the process of repaying these debts is similar for all student loan borrowers. Consistent standards for quality service for all borrowers can help ensure that consumers know what to expect from their student loan servicer and that distressed borrowers can access available assistance.
- Hold servicers accountable: Regulators must continue to act to protect borrowers if errors occur or if servicers break the law. Consumers should be able to access adequate customer service to answer questions and resolve errors. The framework also calls for continuing to build coordination among federal and state agencies around the enforcement of federal and state consumer financial laws, higher education laws and regulations and federal servicing contracts made by the U.S. Department of Education.
- Provide access to clear, timely information: Borrowers expect student loan servicers to inform them about repayment options and help them enroll in alternative payment plans. This framework calls for information provided by servicers to be accurate and actionable, ensuring borrowers are empowered to make choices that encourage borrower success and mitigate defaults.
- Improve publicly available data: Little information is publicly available about the performance of student loans, the utilization of specific repayment options such as income-driven repayment plans for federal student loans, and the outcomes for borrowers enrolled in these plans. The framework calls for greater transparency, including periodic publication of servicer-level data on loan performance.