WASHINGTON — The Consumer Financial Protection Bureau is raising red flags about the servicing of old federal student loans that were once originated by private lenders.
In its annual report of student loan complaints released Wednesday on its blog, the CFPB said there are "new signs of trouble for student loan borrowers," particularly those who got a federal loan from private lenders before those loans, once under the Federal Family Education Loan Program, transferred to the Department of Education in 2010. The CFPB's sample looked only at FFELP loans still held by private investors.
Though federal student loans are now held with the Education Department, the CFPB has oversight of the private servicers that still service those loans as well as the lenders which originated the loans. The CFPB's annual report to Congress found that more than 5 million, or 30%, of borrowers with the old FFELP loans are behind on payments or in default. Those loans still make up a third of all the student loan borrowers to date, totaling more than $370 billion in debt outstanding, the agency said.
"We are particularly concerned about repayment problems facing those with older federal student loans that were made by banks and other private lenders," Seth Frotman, the CFPB's acting student loan ombudsman, said in a blog post. "We found that servicing issues may make repaying student debt even harder for this group of borrowers, in particular."
The study was based on more than 30,000 student loan servicing complaints received since October 2014 and a sampling of loan data the CFPB requested from the largest student loan companies on outstanding FFELP loans. The agency concluded that federal loan borrowers who initially received the loan from a private lender had a greater risk of default than the overall market. And many of these borrowers are struggling to get into new repayment plans based on their current income, often called income-driven plans, through private servicers and lenders.
"For the first time, today's report sheds light on how many of these borrowers are enrolled in income-driven repayment plans. We found that, despite the widespread availability of these plans, the overwhelming majority of borrowers in our sample were not enrolled," Frotman said. "This is particularly concerning given that borrowers in the standard monthly payment plan default on their loans at nearly five times the rate of borrowers who enrolled in income-based repayment, by one recent estimate."
The CFPB's sampling of borrowers with federal loans found that roughly 95% of those that had a FFELP loan were not enrolled in an income-driven repayment plan. But borrowers who received a federal loan directly from the Education Department were three times more likely to be enrolled in income-based repayment plans.
More than 20% of the sample borrowers who had a FFELP loan are now delinquent or in forbearance but have not yet defaulted. This "shows substantial signs of borrower distress," the CFPB study said.
The CFPB's annual report follows a joint action that the CFPB took Sept. 29, along with the Education Department and Treasury Department, that established principles on student loan servicing. The CFPB also released a report on servicing problems at the same time.
The CFPB's study also called for policymakers to compile better performance metrics on student loans that could be published periodically. The study looked at a sample of more than 7 million borrowers as well as 6,400 private student loan complaints and 2,300 debt collection complaints related to both private and federal student loan debt received from Oct. 1, 2014, to Sept. 30 this year.
The CFPB's annual study "also calls for better information about the entire student loan market, including more details about delinquencies, defaults, and how borrowers in income-driven payment plans fare over time," Frotman said. "It also shows why last week's call to establish clear and consistent industry-wide standards is an important part of the Bureau's ongoing work to help make sure student loan borrowers are treated fairly."