The Consumer Financial Protection Bureau’s (CFPB) annual ombudsman report focuses on the problems many borrowers face trying to repay private student loans. We applaud the CFPB report, especially since it is so difficult for borrowers to get relief from burdensome private student loan debt. The agency also issued an advisory to help borrowers pay off their loans more quickly if they are trying to do so.
The CFPB reported that almost half of all of the complaints from private student loan borrowers were from consumers seeking loan modifications or other relief. These results affirm the need for policymakers and regulators to come up with creative solutions to provide relief, especially for those borrowers stuck with predatory loans made by so many lenders prior to the credit crash. It is also essential to restore bankruptcy rights for these borrowers.
The CFPB report is an important contribution to the growing evidence of dysfunction and breakdowns in the student loan servicing industry. For example, the largest private student lender and servicer, Sallie Mae, announced recently that delinquency rates on its private student loans increased because of problems with the company’s servicing systems. We need to hear from Sallie Mae about what it is doing to fix the problems AND to make sure that borrowers are made whole. You should let the CFPB and your servicer know if you have experienced these types of problems.
The news is not much better on the federal loan side, but the Department of Education is trying to make improvements. For example, the Department announced that it is working to make sure that all federal loan borrowers have just one servicer. This “transfer initiative” will go on through March 2014. The Department is reminding borrowers that loan servicers can help with all sorts of questions and problems, not just about repayment. Servicers, they say, are “…there to ensure that you, as a federal student loan borrower, get the customer service and repayment support you need to successfully repay your student loan.” In response to this reminder, a borrower asked whether he can do everything that a private “student loan debt relief” company can do without their $699 fee? The Department has not yet responded, but we hope the answer is YES—Government loan serivcers should be able to help borrowers get loan consolidations or other programs, definitely for free. Borrowers should get neutral counseling and should be able to make choices that work best for them.
Unfortunately, in our work with clients, we rarely encounter this level of service. I was meeting with a financially distressed client last week, for example, who was barely managing to stay current on an old guaranteed consolidation loan (FFEL loan). She had been living in a domestic violence shelter for some time. She is temporarily living with a friend while her son lives with other family members. She is trying to get back on her feet and find work. It is difficult and she is only earning about $5,000/year. Yet when she called her federal loan servicer for help, they put her in a short-term forbearance. For the last serveral years, they have placed her in forbearances and deferments. She says that no one even mentioned income-based repayment (IBR). She called the servicer while I was in the room and sure enough, the representative mentioned another forbearance. The representative only mentioned IBR when I got on the phone and asked about it. What is this about? How hard is it to mention the range of options? IBR is not for everyone, but it seems like a pretty good idea for a borrower earning about $5,000/year with mountains of credit card debt and a student loan balance of almost $15,000. She hopes to improve her financial situation, but for now, her main goal is to stay out of default and avoid collection agency harassment and the draconian collection powers of the federal government.
It’s nice that the government is reminding borrowers to take advantage of the free counseling offered by servicers, but who is making sure that the counseling is comprehensive and accurate? Among other things, we need to know more about how the government is paying the servicers. If they are paid mainly by customer volume, we will have an important clue as to why they so often prefer the quicker forbearance and deferment options over the more time-consuming IBR process. There is public information about the contracts, but we need more information. Policymakers, regulators, taxpayers and borrowers all need to know if the servicers are complying with the law and serving borrowers.
What about the borrower who responded to the Departments’ reminder by asking about private “debt relief” companies? Our June 2013 report highlights the many problems with these companies. Unfortunately, consumers are often drawn to them when they don’t get what they need from the government servicers. This should not be the case. The debt relief companies charge (often a lot of money) for services that are available for free. They are rarely up-front about what they are selling, claiming to offer “special deals” when in fact they are talking about government programs that are available for free. To make matters worse, the private companies often lack the expertise to give accurate information.
There is a lot of work to do to improve student loan servicing, but not all solutions require new laws and regulations. The first step is to make sure that the servicers have proper incentives to serve borrowers and that they know that there is rigorous oversight if they fail to do their jobs.