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It might be too early to measure the impact of the Department of Education's recent moves to roll back critical protections for student borrowers. But in what could foreshadow more problems to come, complaints about student loan servicers, the companies that process payments, have been surging.
Just-out data from the Consumer Financial Protection Bureau shows that complaints about student loans jumped 325 percent the first three months of the year compared with the same period a year ago. No other financial product or service the CFPB tracks saw as sharp an increase.
Two-thirds of the complaints involved loan servicers, the companies that are the main point of contact when student borrowers need information about their loans or have trouble making payments.
In another new report (PDF), the CFPB found that servicers routinely made errors and provided misinformation, such as failing to refund charges wrongly imposed, even after being made aware of the errors. Those charges resulted in late fees and added interest, boosting the size of the outstanding debt.
“Their slipshod practices are putting borrowers at risk of financial failure, and we will hold them accountable,” says Richard Cordray, director of the CFPB, which has stepped up its oversight of student loan servicers.
In late March, Secretary of Education Betsy DeVos rescinded student borrower protections put in place over the last few years by the Obama administration. She eliminated a 60-day grace period that allowed students in loan default to get back on track and avoid a fee of 16 percent of their loan balance. The Department of Education also rehired two debt-collection companies that it said last year would be fired for misleading student loan borrowers.
“Given Secretary DeVos's recent actions to roll back basic borrower protections, the CFPB's work is all the more important as a backstop against abusive loan servicing and collections practices,” says Suzanne Martindale, a staff attorney at Consumer Reports and an expert on student loan concerns.
How Loan Servicers Hurt Borrowers
The CFPB said the surge in servicer complaints is probably due to higher awareness about problems with student loan servicers after the CFPB and several state attorneys general filed lawsuits in January against Navient, the largest student loan servicer.
The lawsuits allege that Navient processed payments incorrectly, gave borrowers bad information, made it more difficult for them to enroll in more affordable payment plans, and failed to act when borrowers complained.
Navient disputes the charges, and in documents filed in a motion to dismiss the case in March, the company said that its role is merely to collect loan payments and that borrowers shouldn’t expect it to provide advice about their payment options. According to Navient: “There is no expectation that the servicer will act in the interest of the consumer.”
Navient was the most complained-about loan servicer in the CFPB report, with an average of 1,400 complaints in each month of the period studied. The next two most complained-about student loan servicers were FedLoan and American Education Services, which averaged 148 complaints and 73 complaints, respectively.
Consumer advocates say the problems with servicers are a major contributor to the sharp rise in loan defaults. Last year, 1.1 million federal student loans were in default, up 15 percent from 2015, according to an analysis by the Consumer Federation of America. "Borrowers have had significant troubles with their servicers," says Persis Yu, director of the National Consumer Law Center's Student Loan Borrower Assistance Project. "These problems are costly for borrowers. They lead to unnecessary defaults or add unnecessary charges to loans."
The guidelines DeVos rolled back were aimed at reducing defaults. They called for major changes in servicer practices, including new standards for responding to borrower problems in a timely way, providing economic incentives to give high-quality customer service, and imposing penalties for poor performance.
“Servicers must better align their incentives and business processes to ensure they are aligned with borrowers’ long term success,” says Seth Frotman, student loan ombudsman for the CFPB.
A coalition of almost two dozen state attorneys general also criticized DeVos's action to do away with rules to rein in loan servicer misconduct. In a letter sent to the Department of Education earlier this week, the group said, "At a time when the need for commonsense federal student loan servicing reforms is undeniable, the Department's decision to roll back essential protections imperils millions of student loan borrowers and families."
What to Do If You Have Problems Paying Your Loans
The Department of Education estimates that about 1 in 4 of the 44 million student loan borrowers in the U.S. are in default or late on their loans. Seventy percent of those in default are eligible for lower monthly payments on federal student loans, according to a report by the Government Accountability Office.
If you have student loans and your servicer isn’t giving you the help you need, here’s what you can do to protect yourself:
Keep good records. Make sure you know who your servicer is and what kind of loans you have, and keep records of what you owe and the payments you’ve made. If they're federal loans—most student loans are—you can find the name and contact info for your servicer in this national database. If you have a private student loan, try checking your credit report. You can get a free copy of your annual credit report at annualcreditreport.com.
Know your options. If you’re struggling to make payments and have federal loans, there are a number of payment plans that can reduce your monthly bill. But the options can be confusing, and student loan servicers often give out bad information. Use the Department of Education’s Repayment Estimator to calculate your federal student loan payments under each repayment plan. Or try the CFPB’s Repay Student Debt tool, an interactive guide that takes borrowers through their repayment options. If you’re struggling to pay your loans, you can enroll in an income-driven repayment (IDR) plan to adjust your monthly payment to as little as 10 percent of your discretionary income. To start making payments under an IDR plan, enroll online at StudentLoans.gov.
Private loans don’t offer the same consumer protections and flexible payment plans that federal loans do. But the CFPB says many lenders may also offer alternative payment options if you can’t make your full payment.
File a complaint. Many student loan servicers have their own ombudsman whose job it is to help borrowers resolve problems, according to financial aid expert Mark Kantrowitz. If your servicer isn't helping you, you can file a complaint online or call the CFPB at 855-411-2372, whether you have federal or private loans. The CFPB says it will forward your complaint to the servicer and work with it to resolve the problem. For federal loans you can also file a complaint on the Department of Education’s loan complaint site.
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