Although you’re borrowing money from the federal government to pay for college, the companies that collect your student loan payments are the ones you are having the most contact with as a borrower. They’re the ones you’re contacting to consolidate your student loans and ask questions about income-based repayment plans. Those are the companies that send you letters and emails with the subject line, “Don’t forget about us!” and “Reminder: Your payment is due.” A couple examples of major student loan servicers are Great Lakes, American Education Services, and Navient.
Unfortunately, those companies often make errors or fail to let struggling borrowers know what their full range of options are. On Tuesday, the Consumer Financial Protection Bureau released a report on borrowers’ experiences with student loan servicers, or companies that take payments on a borrower’s loan and monitor payments. The report is a major step forward for advocates who want to see the U.S. Department of Education acknowledge serious deficiencies in the way student loan servicers communicate with struggling borrowers. This is important because 70 percent of borrowers who are in default qualified for income-based repayment plans, according to the U.S. Treasury’s 2012 analysis, and borrowers are largely unaware of their options. To make matters worse, the average balance for borrowers is increasing. The average balance per borrower in 2007 was $18,233 compared to $28,973 in 2015 and 25 percent of student loan borrowers are delinquent or in default, according to U.S. Department of Education data.
According to the report, borrowers say that student loan servicers, which are paid millions of dollars by the federal government, fail to proactively mention income-based repayment plans when borrowers are struggling to make payments. Instead, what often happens is that servicers suggest forbearance or deferment instead, or simply insist borrowers make the full payment on their loans.
When it came to actually setting up an income-driven repayment plan, borrowers experienced major errors from student loan servicers. For example, borrowers who wanted to enroll in such a plan after consolidating their federal student loans, found that they were put in standard repayment plans, which means that the payments may not properly match borrowers’ income level. When this happens to borrowers who are consolidating to request Public Service Loan Forgiveness, it can increase the amount borrowers have to pay over the duration of the loan or trigger the selection of a repayment plan that doesn’t qualify for loan forgiveness.
The government acknowledges poor student loan servicers
The U.S. Department of Education, U.S. Treasury and Consumer Financial Protection Bureau released joint principles on student loan servicer practices before the release of the report on Tuesday. The principles state that the departments and the bureau are committed to making sure that borrowers get the information they need to avoid defaulting on their loans, that the institutions will ensure that there are protections in place to treat struggling borrowers fairly and that student loan servicers will be “held accountable for their conduct.”
On accountability, the departments and bureau released a statement saying, “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.”
Ben Miller, senior director for postsecondary education at the Center for American Progress, said that the guiding principles are a positive step forward, but the federal government needs to ensure that actual rules protecting borrowers are introduced.
“For too long, student loan servicing has been the Wild West for borrowers with little hope of consistency, accuracy, or accountability,” Miller said in a statement. “The joint principles on student loan servicing announced today are a good first step, but the CFPB should move quickly to write rules that ensure student borrowers are protected from shoddy servicing practices.”
Which borrowers are suffering the worst?
Some of the borrower populations the CFPB considers most vulnerable in its report are veterans, servicemembers, older borrowers and co-signers who are trying to pay for retirement and make payments on student loans, and struggling borrowers who are contacted by scammers offering student debt relief for a fee. Servicemembers say that they face various roadblocks when they try to access special deferment options. Even though some borrowers can discharge federal student loans if they have a total and permanent disability and veterans who fall under this definition are able to apply for student loan forgiveness, disabled veterans say their credit scores were damaged, even after a discharge they received after a service-connected disability. Those veterans never missed a payment. One of the problems older co-signers face is that they don’t see billing statements or missed payments until the primary borrower is delinquent.
Scams target struggling borrowers will often pay anywhere from $195 and $2,500, often as an upfront payment, to these companies. The scammers apply for income-based repayment plans even though borrowers can do this on their own for free. Google search results make it even more difficult for borrowers to find government sites that explain how to apply for repayment plans and companies insist that the process is to complicated to navigate by oneself. Student loan servicers counter that the process is complex, which they say exacerbates confusion among student loan borrowers, the report states.
For too long, student loan servicing has been the Wild West for borrowers with little hope of consistency, accuracy, or accountability.
Why student loan debt needs to be treated like mortgage and credit card debt
Unlike mortgages and credit cards, there is no federal statutory or regulatory system in place for student loan servicers that would protect student loan borrowers. Unsurprisingly, trade associations representing those in the student loan servicing industry said those policies are ill-advised because student loans are far too different from mortgages and credit card debt.
However, nearly two dozen law professors quoted in the report disagree, and advocate for similar protections, especially since student loan debt is a quickly growing share of overall consumer debt. If these protections were in place, student loan borrowers may be able to go to a specific person for their loan records, have student loan servicers make a “good faith effort” to reach them and have better access to documents they need to apply for income-based repayment plans, similar to how mortgage servicers behave.