The Consumer Financial Protection Bureau has opened a public inquiry into student loan servicing practices that it believes make paying back student loans “stressful or harmful.”
Private and federal student loan debt across the county amounts to over $1.2 trillion. These loans are not serviced by lenders, but by a company that then processes monthly payments and helps borrowers find ways repay their loans after job loss, among other roadblocks to repayment. These companies receive a flat fee for their services.
Meanwhile, there are 8 million student loan borrowers across the country in default on their loans. The agency believes these borrowers may not have been given all of their repayment options to keep them from reaching this point. According to the agency, a large number of those in default could have avoided their current situation if they had been told about all of the affordable repayment plans available to them.
A default could cause long-lasting financial effects for someone trying to establish good credit in order to finance their first major purchases.
“Student loan servicers often make more money when they spend as little time as possible on each account, and they typically get paid more when a borrower is in repayment longer,” Richard Cordray, director of the agency, said at a hearing in Milwaukee focused on student loan servicing. “So we are evaluating whether the typical methods of servicer compensation can jeopardize the interests of borrowers.”
The agency is concerned about the number of customer complaints with regards to payments taking too long to process, lost paperwork, mistakes not fixed fast enough, or the pre-payment of their loans not being handled correctly. To date, the agency has received over 28,000 such complaints in the last two years.
“Student debt stress can make borrowers feel like they are walking a tightrope where any false move in paying back a loan can cause them to fall,” Cordray said in a statement. “Today’s inquiry seeks information on the pain points in student loan servicing that make repayment a more difficult and stressful process.”
Advocates for borrowers also report hearing similar complaints, saying the quality of service offered is often inconsistent, as is the advice and help offered to struggling borrowers. “What we want to see is that people get objective counseling,” said Deanne Loonin of the National Consumer Law Center.
The agency is looking at recent changes to the quality of service offered for credit cards and mortgage loans to determine whether how those industries are regulated could be applicable to student loans.
Comments on the matter will be accepted until July 13.