Student loan servicing companies are coming under fire by regulators for the second time in two months.
The Consumer Financial Protection Bureau released a report Wednesday criticizing student loan servicing companies, which are contracted to handle details like collecting monthly payments, for not helping borrowers get into plans that make it easier to repay loans.
The agency’s student loan ombudsman found that in particular, borrowers with older federal student loans may be more heavily impacted by loan servicing problems, although complaints about servicing are widespread.
In September, after analyzing 30,000 public comments that showed companies using “a wide range of sloppy, patchwork practices that can create obstacles to repayment, raise costs, cause distress and contribute to driving struggling borrowers to default,” the bureau announced plans to explore industrywide regulations.
More than 25 percent of all student loan borrowers were behind or defaulting on their loans, according to the September report, while Wednesday’s shows that 30 percent of borrowers with Federal Family Education Loan Program loans are behind.
Both reports point to problems like paperwork processing delays, inconsistent instructions from loan servicers and difficulty enrolling in income-driven repayment plans as contributing to struggling borrowers’ challenges.
Natalia Abrams, executive director of Student Debt Crisis, a nonprofit group that pushes for changes in how education is financed, said loan servicing companies “are not alerting the student loan borrowers of all of their options if they run into trouble.”
When a servicer first sees that a borrower is struggling (misses a payment), they are not always proactive in helping the borrower or moving them to a different payment plan.
Anna Griswold, executive director for student aid at Penn State
In a survey of 3,000 borrowers done by the group, almost 60 percent said their loan servicer did not inform them of federal programs to help repay their loan, even though they were eligible to apply for them, Abrams said. Borrowers also complained of loan servicers processing payments late, incorrectly reporting credit scores and losing information.
Although graduated students are not typically referred back to their schools for help with loans, said Anna Griswold, executive director for student aid at Pennsylvania State University, she has heard of problems with servicers from both struggling borrowers and those just trying to pay down their principals early.
Griswold said students receive guidance from their school on loans when they graduate, but servicers have direct access to the borrowers for the rest of their repayment.
“Students are given packets of information when they leave school about their options in loan repayments. Some study these carefully and others may not,” she said in an email. “However, when a servicer first sees that a borrower is struggling (misses a payment), they are not always proactive in helping the borrower or moving them to a different payment plan.”
Despite the Education Department’s requirement that students get counseling when they take out loans and when they graduate, there is still a lack of information and they “don’t know their options,” said Sheelu Surender, director of financial aid at Wichita State University.
“There are so many different types of repayment programs out there,” she said.
The first income-driven repayment plan was created in 2007, and payment plans have become more complicated since, evolving with the Pay as You Earn program from the Department of Education, changes from Congress and the White House.
The complexities of laws around student debt contribute to the lack of information about federal repayment programs, said Beth Akers, a fellow at the Brown Center on Education Policy at the Brookings Institution.
It’s easy to pick on the servicers for doing a bad job, but it kind of begs the question, why is it so difficult for students to navigate the system on their own in the first place?
Beth Akers, a fellow at the Brown Center on Education Policy at the Brookings Institution
“It’s easy to pick on the servicers for doing a bad job, but it kind of begs the question, why is it so difficult for students to navigate the system on their own in the first place?” she said. “It’s just this building up of incremental policy changes that have led to the building of this complex and complicated set of repayment options for borrowers.”
In contrast to legal complexities, there are only a handful of companies that service student loans. For federal loans taken out through the Education Department, there are only 10 companies that do the job.
Servicers’ biggest problem is borrowers who aren’t engaged, said John Remondi, president and CEO of Navient, one of the largest loan servicers, which used to be affiliated with Sallie Mae, a publicly traded corporation involved in the student loan business.
“Ninety percent of the defaults that we see off of our servicing platform each year are from customers who had zero contact with us during the 12 months that it takes to default,” he said in a September statement at a Deutsche Bank conference. “During that time frame, we would typically attempt to connect with that customer 300 times through mail, phone calls, text messages or emails.”
In July, the Consumer Financial Protection Bureau charged Discover Bank $18.5 million for illegal student loan servicing practices, like overstating how much was due on bills and calling consumers early in the morning and late at night to collect debts.
A time line for new rules isn’t specified yet, but the report recommends policy actions like incentivizing servicing companies to enroll borrowers in federal student loans’ flexible repayment options, which would increase their motivation to fit borrowers into the best plans.
Editor’s note: An earlier version of this story misspelled the word “principal.”
Ali Montag: 202-383-6033, @ali_montag