Talk to people with federal student loans and it’s unlikely that you’ll hear praise for companies responsible for overseeing their loans. Now a report issued by the Consumer Financial Protection Bureau confirms what many borrowers have known all along – the system is broken.
The bureau found, “a wide range of sloppy, patchwork practices that can create obstacles to repayment, raise costs, cause distress and contribute to driving struggling borrowers to default.” With public outcry at an all-time high, borrowers as well as servicers are urging new rules to be implemented.
More than 41 million Americans owe student loan debt, with the total doubling from $516 billion to more than $1.2 trillion in the last eight years. The average student loan debt has grown by nearly 60 percent during the same period, rising from about $18,000 in 2007 to nearly $30,000 in the third quarter of 2015.
At the same time, delinquencies have skyrocketed to the point where nearly 1-in-4 student loan borrowers in repayment are delinquent or in default. Given the fact that only 89.5 percent of federal student loans are in repayment – the rest are in some form of deferment or forbearance – a full 3-in-10 outstanding student loans are really past due.
Student loan servicers act as the intermediary between borrowers and lenders. Servicers manage borrowers’ accounts, process monthly payments, manage enrollment in alternative repayment plans, and communicate directly with borrowers, including borrowers in distress. With such explosive growth in the number of borrowers as well as the the total amount of debt they’re called on to manage, it’s easy to see how even the best system can break down.
None of this would be a problem if there were industry standards in place to help borrowers and servicers understand policies and guidelines. Unfortunately, no consistent, market-wide federal standards for student loan servicing exist.
In fact, servicers generally have discretion to determine policies related to many aspects of servicing operations in spite of the fact that they are all under contract with the U.S. Department of Education. The report, based on over 30,000 comments the federal watchdog group received from borrowers, revealed the widespread problems that resulted from these operational problems.
Payments were routinely lost, resulting in late fees and negative credit notations. Military borrowers had a hard time getting the Servicemembers Civil Relief Act interest rate cap of six percent. Older borrowers as well faced an uphill battle in repaying their student loans.
In addition, reports indicate that only 13 percent of borrowers have elected one of the income dependent repayment plans designed to keep them out of default by reducing payments to a portion of income.
Now, at last, the government is attempting to improve the system for all.
The Departments of Education and Treasury, in conjunction with the CFPB, issued a Joint Statement of Principles on Student Loan Servicing to begin to address the problems uncovered. The statement provides as follows:
The Departments and the Bureau intend to work closely with one another, consistent with their respective authorities, to strengthen servicing protections for student loan borrowers, and will seek to ensure that student loan servicing is, where appropriate:
- Consistent. Student loan borrowers and servicers alike would benefit from a clear set of expectations for what constitutes minimum requirements for services provided by student loan servicers and servicer communications with borrowers, including adequate and timely customer service. Student loan borrowers should expect effective student loan servicing, including, but not limited to, conduct related to payment processing, servicing transfers, customer requests for information, error resolution, and disclosure of borrower repayment options and benefits. Such conduct should account for and recognize variations in loan features, terms, and borrower protections.
- Accurate and Actionable. Student loan borrowers often depend on servicers to provide basic information about account features, borrower protections, and loan terms. It is critical that information provided to borrowers by student loan servicers be accurate and actionable. Information, including explanation and instructions regarding borrowers’ loans and repayment options, should be presented in a manner that best informs borrowers, helps them achieve positive outcomes, and mitigates the risk and costs of default.
- Accountable. Student loan servicers, whether for-profit, not-for-profit or government agencies, should be accountable for serving borrowers fairly, efficiently and effectively. If servicers fall short and violate federal or state consumer financial laws, the HEA, contractual requirements, or federal regulations, borrowers, federal and state agencies and regulators, and law enforcement officials should have access to appropriate channels for recourse, as authorized under law.
- Transparent. The public, including student loan borrowers, may benefit from information about the performance of private and federal student loans and the practices of individual student loan lenders and servicers, including information related to loan origination, loan terms and conditions, borrower characteristics, portfolio composition, delinquency and default, payment plan enrollment, utilization of forbearance and deferment, the administration of borrower benefits and protections, and the handling of borrower complaints. The federal government already makes much of this information available for federal student loans, and private-sector lenders and servicers should follow suit. Portfolio performance data, including data at the individual servicer level, should be available for all types of student loans.
The CFPB report as well as the Joint Statement of Principles on Student Loan Servicing are all part of President Obama’s Student Aid Bill of Rights, which directed federal agencies to improve student loan servicing and help make paying for higher education an easier and fairer experience.
For millions of borrowers, this is a step in the right direction. With consistent standards, not only will those paying for college be better protected but they will also be assured of a more accurate and fair means of having their loans serviced.
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