CFPB reports on student loan servicing failures

Friday, October 09, 2015

The Consumer Financial Protection Bureau (CFPB) released its new Student Loan Servicing Report this week, outlining widespread servicing failures reported by student loan borrowers with both federal and private student loans. The report found that a vast majority of the more than 10 million Americans who have defaulted on or are behind on repaying their student loans could have benefited from income-driven repayment plans that are intended to ease pressure on distressed borrowers and keep them from defaulting on their payments. These plans can allow borrowers with low income or high debt — or both — to pay less each month, or even nothing, until their finances improve without being penalized or going into default. However, many borrowers never hear about these payment plans, thanks to poor customer service by the companies that are paid more than $600 million a year by the government to manage these accounts, process monthly payments and enroll distressed borrowers in alternative repayment plans.

The CFPB’s press release attributed “a wide range of sloppy, patchwork practices” as creating obstacles to repayment that drive struggling borrowers to default. The report also signifies an increased effort by the CFPB to address issues plaguing the industry and suggests servicers will be subject to increased scrutiny in the future.

The report details the more than 30,000 comments the CFPB received in response to its May 2015 public inquiry seeking input on and recommendations for improving student loan servicing practices. The comments came from individual consumers, state attorneys general and banking regulators, trade associations and other organizations. The report highlights a host of problems borrowers face, including lost paperwork and payment processing errors, difficulties in correcting servicing errors and issues accessing affordable repayment options or alternatives to avoid default. Commenters also responded to queries regarding the similarity of the problems facing the student loan servicing industry to issues in the mortgage market after the financial crisis and suggested that the reforms made to mortgage practices could inform future changes to student loan servicing.

Loan servicers are a critical link between borrowers and lenders. They manage borrowers’ accounts, process monthly payments and communicate directly with borrowers. When facing unemployment or other financial hardship, borrowers must contact student loan servicers to enroll in alternative repayment plans, obtain deferments or forbearances, or request a modification of loan terms. The servicer is often different than the lender and a borrower typically has no control over which company services a loan.

For more information, please visit the CFPB’s website for students.