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Two months ago, the Consumer Financial Protection Bureau took the first steps in tackling issues within the student loan servicing arena by asking consumers and organizations to share their thoughts on the state of an industry that is tasked with recouping the more than $1.2 trillion in outstanding student loan debt in the U.S. Now, as the deadline to submit comments has come and gone, we know a bit more about just how the industry is perceived by those tasked with sticking up for consumers.
From employing inconsistent practices to disbursing confusing and sometimes misleading information about borrowers’ rights, consumer groups tell the CFPB that the student loan servicing industry is in urgent need of improvement and better oversight by regulators.
Loan servicers are the companies that process loan payments and manage borrowers’ accounts. In most cases, it’s a third party that had nothing to do with issuing the loan but is now responsible for making sure it gets repaid.
And while one might assume that loan servicing is a reasonably simple process –collect payments, post them to the account, adjust the balance accordingly, work with customers who are having trouble making payments — it isn’t.
Over the past several years, many student loan borrowers have reported a wide variety of problems with their loan servicers. A 2013 report from Consumers Union included anecdotal claims of servicer incompetence, like the borrower who was being charged more than twice the interest rate he was supposed to pay.
More recently, the CFPB found that some student loan servicers took part in several illegal and shady practices, including inflating borrowers’ minimum payments, making illegal collection calls and charging unlawful late fees.
Borrowers rarely have any say in the servicer handling their loan, or whether that loan gets sold to another servicer. Between 2010 and 2013, 10 million federal loan borrowers had their loan servicing company changed on them. The CFPB says it’s heard repeated complaints from borrowers who experienced servicing and billing interruptions during the transition from one servicer to another.
Maura Dundon, senior policy counsel for the Center for Responsible Lending, says in a statement that fair student loan servicing is “critical to protect borrowers and help them repay their loans successfully.”
Unfortunately, as Dundon points out in CRL’s comments [PDF] to the CFPB and the Bureau’s own reports, the current state of student loan servicing often hurts consumers more than it helps them.
“Student loan servicing stands today where mortgage servicing stood over a decade ago: critically important and largely ignored,” Dundon says in a statement. “We have seen that the handling of student loans is rife with problems; some student loan servicers have been known, like mortgage servicers before them, to engage in deceptive practices, flout contractual obligations, evade borrower requests, and apply the loan terms in a way that benefit the servicer – not the borrower or investor.”
As a result of these issues, The Institute for College Access & Success tells the CFPB [PDF], is the creation of an environment in which borrowers cannot count on servicers to provide information and assistance that could help them make affordable payments and stay out of default.
“Indeed, poor servicing has spawned a growing industry of for-profit ‘debt relief’ companies that charge high fees for services that the government is already paying federal loan servicers to provide at no cost to borrowers,” TICAS says in its comments to the CFPB.
While both CRL and TICAS provide comments that focus on the need to improve student loan servicing as a way to protect borrowers, the groups take slightly different approaches. TICSA focuses on a need for more data within the federal and private education loan servicing system, while CRL draws parallels between the current state of loans servicing and the mortgage servicing industry that helped to usher in the Great Recession.
TICAS focuses on five areas in which gaps in student loan data pose an obstacle for policymakers and stakeholders seeking to address the consumer risks associated with student loans servicing: Federal Family Education Loans (FFEL) and private education loans; servicer-level data; college-level data; factors associated with delinquency and default; and demographic characteristics of borrowers.
According to TICAS, regulators can begin to create rules to protect consumers against unscrupulous loan servicing practices without more information on private and FFEL. Currently, the organization estimates that 41% of all outstanding student loan dollars come from these types of loans, yet there is no servicer-level data, and in some cases no data at all, on loan status, loan terms, or repayment plans.
Much of CRL’s comments to the Bureau focus on the similarities between current student loan servicing practices and those of the mortgage serving industry a decade ago.
“Although mortgages and student loans differ in key ways, the importance of servicing is common to both types of loans,” CRL’s comments state. “When the mortgage crisis made millions of borrowers unable to pay their loans as agreed, the flaws in the servicing system were revealed. Lessons learned from the mortgage crisis – especially insufficient loss mitigation caused by a disconnect between servicers, investors, and borrowers – highlight the need for student loan servicing reform.”
For example, CRL points out, like mortgages, federal student loans and some private loans are outsourced to third-party servicers with interests that may not be in line with that of the loan holder, which can create a conflict-of-interest between the loan holder, borrower, and servicer.
When it came to mortgages, this issue led people to lose their homes in foreclosure when they shouldn’t have. CRL suggests that, in time, these same issues in student loans servicing can lead borrowers to default instead of being placed in programs meant to help them pay their debt, such as income-based repayment plans.
“Instead of supporting higher education, the present student loan servicing system can make it more difficult for borrowers to realize the promise of their investment,” Dundon says. “As American students increasingly rely on loans to pay for college, the student loan servicing system will impact more and more people and families. Reforms, like the reforms to the mortgage servicing system, can resolve bad practices and ensure proper protections for borrowers.”
It is unclear when the CFPB plans to make a statement or take action regarding its request for information on student loan servicing, but consumer groups have made it clear that sooner rather than later is the best option.
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