According to a report recently issues by the Consumer Financial Protection Bureau, student loan borrowers are paying more than $125 million in unnecessary interest charges annually, and more than 8 million borrowers have gone 12 months or more without making any sort of payment. The data suggests that income-driven repayment plans (IRD) and the reinstatement process, which are designed to help struggling borrowers prevent or reverse a default, aren’t as effective as they should be.
The report was compiled over the past 12 months taking data and complaints from consumers. According to the CFPB, the information identified a range of problems with payment processing, billing, customer service, borrower communications, and IDR plan enrollment. These consumers submitted complaints about nearly 300 companies, including student loan servicers, debt collectors, private student lenders, and companies marketing student loan “debt relief.” For five of the largest student loan servicers, borrowers reported a broad range of servicing problems across each company’s operations.
The CFPB report revealed that one in three rehabilitated borrowers will end up back in default after just two years because of processing delays and communication issues. Hundreds of thousands of borrowers who would qualify for a $0 monthly payment will end up in default because they were not made aware they were eligible for an IDR, racking up unnecessary interest charges, which adds to the total due.
Even borrowers who submit the appropriate applications and paperwork for IDR on time can end up in default. Some individuals experience delays that last for months, and because their application goes unapproved, the default process overtakes them while they wait. At that point, they no longer qualify for IDR help.
The system, according to the CFPB, is currently stacked against borrowers. Debt collectors are incentivized to get money right now, not to find long-term solutions. The report highlighted that debt collectors get paid $40 for every $1 they collect, so borrowers are often not informed of their options. In some cases, borrowers made payments, but debt collectors applied the money to the debt outside of the rehabilitation process. That means the borrower is still in default, despite paying the money that should have gotten them out.
The CFPB report concludes that the process for borrowers to qualify for rehabilitation and IDR plans needs to be simplified and the timeline expedited so people can get out of default more quickly, the bureau said. Also, rather than debt collectors simply collecting past bills, borrowers need to be made aware of all their repayment options that would make the debt more manageable. The CFPB suggested that more guidance, and even perhaps binding regulation, could be forthcoming.