RSSLast week, the Consumer Financial Protection Bureau issued a report critical of student loan processors. The report, found here, alleged widespread servicing failures reported by both federal and private student loan borrowers. The White House has tasked the CFPB, the Education Department and the Treasury Department with delivering recommendations this week on how to improve student loan servicing.
Although the CFPB has no jurisdiction to regulate student loans, the bureau nonetheless collected more than 30,000 public comments on student loan servicing. The report cites many shortcomings in loan processing. In a statement issued with the report, the bureau said it had “made it a priority to take action against companies that are engaging in illegal servicing practices” and would “explore potential industry-wide rules to increase borrower protections.”
According to the CFPB, more than 41 million Americans collectively owe more than $1.2 trillion in student loan debt, making student loan debt the second-largest class of consumer debt behind home mortgages. The report notes that “the student loan market continues to show elevated levels of distress relative to other types of consumer debt, despite recent improvements in the labor market and the near universal availability of income-driven repayment plans for borrowers with federal student loans experiencing financial hardship.” The Bureau estimates that more than one in four student loan borrowers are now delinquent or in default on a student loan.
Loan servicers are typically different from the lender, and servicers can and do change. More than 10 million borrowers have seen their loan handed off between companies in the past five years, creating confusion about how to repay the debt. Servicers manage borrowers’ accounts, process monthly payments, arrange and manage enrollment in alternative repayment plans and communicate directly with borrowers. But because servicers don’t have a financial incentive to spend extra time enrolling clients in these plans, they may fail to do so, putting the borrower at risk. Issues with servicers are driving up the costs of student loans and driving borrowers into default, according to the CFPB. The report notes that the lack of credible information available to borrowers about their repayment options has spawned an entire industry of scam operators.
According to the CFPB, “If servicers fall short and violate federal or state consumer financial laws, the Higher Education Act, 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.”
