Earlier this year, the Consumer Financial Protection Bureau (CFPB) issued its report, "Private Student Loans," highlighting a number of issues with regard to private student loans, and concluding that federal student loans are the better choice for the vast majority of borrowers. The Student Loan Ranger agreed.
And we continue to agree, especially in light of the CFPB's Student Loan Ombudsman's more recently issued "Annual Report," which highlights issues faced by borrowers when dealing with servicers of private loans.
The report was based on complaints received by the CFPB, submissions of stories through the CFPB's website, town halls and discussions with borrowers, and comments submitted by the public and by organizations that receive complaints about student loans.
[See five common private student loan complaints.]
The majority (65 percent) of issues reported fell into the "Repaying your loan" category, which includes "fees, billing, deferment, forbearance, fraud, [and] credit reporting," with the most common being "the difficulty negotiating a repayment plan with their servicer in periods of unemployment, underemployment, or financial hardship."
To the Student Loan Ranger, this is extremely troubling because it means that borrowers in distress—and at risk of defaulting—who are attempting to work with their servicers are, as the CFBP describes it, "Responsible Borrowers Stymied."
But beyond being stymied, these borrowers must rely on their servicers to provide them a workable plan if they are to avoid default because private loans lack the standard borrower protections of federal loans, including default-aversion protections like deferment, forbearance, and income-driven repayment plans. Without help from their servicers, they are left no option but default.
[Find out how to avoid loan default.]
Even more troubling to the Student Loan Ranger: Some borrowers who followed servicer instructions to make good faith payments—sometimes amounting to more than 50 percent of their take-home income—still ended up in default.
There were also a number of issues highlighted as "Servicing Surprises." Notably, borrowers who may be seeking to restructure other debt through bankruptcy so they'll able to pay student loans (since student loans generally can't be discharged through bankruptcy) found the filing actually triggered the default on their student loans they were trying to avoid.
And, in what the CFPB described as "Unexpected checking account transactions," when a borrower had a checking account with the same company that handled their loan, the lender would, without notice or agreement, deduct funds from their checking account.
Also notable was borrower "[c]onfusion when loans and servicing rights are bought and sold." The Student Loan Ranger has heard from many borrowers of both federal and private student loans who've had a difficult time identifying and communicating with servicers. (Some have had numerous changes in servicers.)
[Find out what to ask your student loan servicer.]
They've experienced failure to receive statements, and unexplained changes in amounts due and total balances. The Student Loan Ranger also has heard from borrowers who suddenly find their account reflects a $0 balance, when in fact they've been unknowingly placed in forbearance. Payments aren't due, but their loans are accruing interest and their balance is increasing—a scary situation for borrowers who are trying to stay up-to-date.
The report highlights many additional issues, including "Frustration[s] Faced by Struggling Borrowers," which includes difficulties regarding debt collection, the primary borrower's death and monthly forbearance fees (problematic because borrowers usually need forbearance because they can't afford monthly payments) among a slew of other important issues.
It also sets forth some recommendations, including loan modification and refinancing, determining whether efforts around mortgage servicing could help in the student loan context, and continuing to work to increase the use of Income-Based Repayment (IBR)—the logic being that lower payments on federal loans allows borrowers to make private loan payments.
The Student Loan Ranger likes that suggestion but feels that to truly free up income for private loan payments, IBR must start considering private loan debt when considering a borrower's debt-to-income ratio. Currently, "debt" only counts federal student loans. To learn how IBR and other plans work, attend one of our free webinars.
[Learn more about federal student loan repayment plans.]
Certainly, servicing issues aren't limited to private student loans. Last month, seven Republican lawmakers requested the Government Accountability Office to issue a detailed report on federal student loan servicing. But the Student Loan Ranger hopes there can be a more detailed investigation of private student loan servicing.
Addressing these issues and finding relief for these borrowers is especially crucial because the lack of protections means servicing issues on the private side can be much more impactful.
Radhika Singh Miller is a program manager for Educational Debt Relief and Outreach at Equal Justice Works. She has served on student loan committees in the Department of Education's negotiated rulemaking focusing on the College Cost Reduction and Access Act (CCRAA) and other debt relief initiatives. Radhika graduated from Loyola Law School Los Angeles. Prior to joining Equal Justice Works, she was a staff attorney at the Partnership for Civil Justice, focusing on constitutional and civil rights litigation and advocacy.