Private Student Loan Borrowers Struggle With Lenders, Report Finds

Private loan borrowers suffer from a lack of flexibility in repayment and poor communication.

Penalties for defaulting on student loans include seizure of tax refunds, garnishment of wages and the partial taking of Social Security payments.

[ALSO: Half of All Student Loan Debt Isn't Being Repaid]

And on Sept. 23, Chopra posted a blog post on the CFPB website taking aim at the Department of Education's preferred loan servicers, including Sallie Mae, the department's largest contractor.

"Sallie Mae ranks the worst in borrower, school, and federal personnel satisfaction," Chopra wrote in the post, which analyzed Servicer Performance Reports.

In the CFPB report released Tuesday, Chopra writes that many of the same concerns with private servicers still persist.

One problem Chopra outlines in the report is the fact that loan servicers apply advanced payments or overpayments in a way that does not actually benefit the borrower. Rather than applying a higher payment to the loan with the highest interest rate, Chopra says lenders often distribute the payment across several different loans, prolonging a borrower's repayment period and the amount of interest accrued.

"While faster repayment is good for a borrower looking to save more in interest or apply for a mortgage, it often means less profit for a lender or servicer," Chopra said.

Similarly, Chopra says lenders manipulate underpayments to maximize the amount of late and penalty fees a borrower will incur if he or she is unable to pay the full monthly balance. Rather than making the full payments for as many loans as possible (starting with the loan with the lowest monthly balance and working up), lenders sometimes allocate the payment across all loans without fully paying off any. That means the borrower will incur a late fee for each loan, further damaging his or her credit score.

Chopra said many borrowers complained about breakdowns in communication with their lenders and servicers, particularly if their loans are transferred between servicers.

"Basic account information is sometimes unavailable, records are not retained, and borrowers are ping-ponged from one customer service representative to the next and to the next, without getting an accurate or even consistent answer," Chopra said.

[MORE: CFPB Wants Student Loan Breaks for Public Employees]

Given the similarities with the mortgage servicing crisis, Chopra said it is surprising that more institutions have not acted to prevent a breakdown of the same calibur.

Chopra recommends in the report that policymakers consider implementing some regulatory measures from other markets, such as credit cards and mortgages, to help improve the functioning of the student loan market.

Some of those regulatory measures include notifying borrowers before and after there is a change in their loan servicer, earlier intervention for borrowers approaching default, and a more timely posting of payments.

"If industry fails to correct deficiencies in the student loan servicing market, policymakers may need to act to avoid further negative consequences for the economy," Chopra writes in the report.

More News:

  • Report Suggests Reforms to Help Private Student Loan Borrowers
  • Study: Young Credit Card Users Are More Responsible
  • Student Loan Default Rates Rise for Sixth Straight Year