At more than $1 trillion, student loan debt is now the largest source of consumer debt, even ahead of credit cards. Forty percent of American households headed by someone younger than 35 years old have student loan debt. Although most of the loans are through government programs, private student loans account for more than $150 billion. More than 850,000 private student loans are in default and more are delinquent.
The Consumer Financial Protection Bureau has targeted student loans as an area for study. On Oct. 16, the CFPB issued a 22-page report on the private student loan arena. The report considers 2,900 complaints it has received about private student loans since March. Ninety-five percent of the complaints were related to servicing. The report says 65 percent were related to fees, billing, deferment, forbearance, fraud and credit reporting; 30 percent were related to an inability to repay the loan, and 5 percent were related to getting a loan in the first place.
Eighty-seven percent of the complaints were directed at just seven companies: Sallie Mae (46 percent); American Education Services (12 percent); Citibank (8 percent); Wells Fargo (7 percent); JP Morgan Chase (5 percent); ACS Education Services (5 percent); and KeyBank (4 percent).
The CFPB noted similarities between complaints leveled against private student lenders and those leveled against mortgage lenders. In both cases, most loans are managed by a servicer who functions between the customer and the actual lender. This arrangement makes it more difficult for the customer to interact with the lender, especially in situations where the borrower is seeking a change in the loan terms. Compounding the situation, the servicer generally considers its customer to be the lender, not the borrower.
The report is authored by Robit Chopra, the CFPB’s student loan ombudsman. He concludes the report with two recommendations.
First, he recommends improvements in the loan servicing process, beginning with a thorough review of the status quo. “It would be prudent to validate the existence of any systemic issues in the student loans servicing market, correct and contain servicing errors and further determine whether additional guidelines are necessary,” the report says.
Second, he recommends promoting more income-based repayment approaches to student loans. The report notes that one way for borrowers to meet the obligations of their private student loans is to apply for federal students loans with an income-based repayment feature.