U.S. student loan borrowers face processing problems, watchdog says


WASHINGTON, Oct 16 (Reuters) - Private student loanborrowers report payment processing errors that hurt theircredit and raised costs, and lawmakers may need to step in ifthe problems hurt the economy, a U.S. consumer watchdog said onWednesday.

Private student loans, which typically carry higher interestrates than federal loans, boomed in the years leading up to the2007-2009 financial crisis, the U.S. Consumer FinancialProtection Bureau said in an annual report.

The bureau estimated outstanding private student loan debtin July at $165 billion.

Borrowers who now struggle to pay off those loans reportedprocessing problems that resembled the servicing issues mortgageborrowers faced in the wake of the crisis, the report said.

It said significant problems unraveled in the mortgageservicing market that hurt the broader economy and said the similarities in the private student loan industry were a warningsign.

"If the industry fails to correct deficiencies in thestudent loan servicing market, policymakers may need to act toavoid further negative consequences for the economy," it said.

The bureau has said in the past that students with heavydebt loads would be less likely to take out home mortgages orconsumer loans, thereby reducing personal spending, which is animportant component of economic growth.

Congress created the consumer bureau in the 2010 Dodd-Franklaw and called for an ombudsman who would watch over bank andother loans to students pursuing higher education.

The consumer bureau's report on Wednesday incorporated about3,800 complaints submitted to regulators starting in October2012. The report did not deal with federal loans, which make upthe vast majority of the student loan market.

Borrowers reported difficulties modifying private loans,paper checks that were lost by their servicers and late feescaused by delays between the time when they submitted paymentsand when the payments were fully processed, the bureau said.

Consumers with multiple loans said they were not able payoff the ones with higher interest rates first. Borrowers whoseloans were transferred reported facing fees after the newservicers lost paperwork or made other errors.

Regulators have cracked down on misdeeds in that arena, andthe consumer bureau issued rules governing mortgage servicing.Banks could apply those changes, such as improving communicationand error resolution, to student loans, the report said.

Lawmakers also could require banks to clean up student loanservicing if the problem persists, the report said.

The private student lending and servicing markets are highlyconcentrated, the bureau said. Big lenders include SLM Corp, or Sallie Mae, and Wells Fargo.

The private loan market is considerably smaller than federalstudent loan programs. Consumer bureau officials have estimatedoutstanding student loan debt at nearly $1.2 trillion, about $1trillion of it through federal government programs.

But for borrowers who graduated at the time of the financialcrisis, private student loans were more common. Among thatgroup, about 80 percent of borrowers with more than $40,000 instudent debt had used private loans, the bureau said.

The market has shrunk in recent years. JPMorgan Chase said in September it would stop making student loans.

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