Borrowers with private student loans often face significant struggles, not only in making their payments, but also in communicating with their loan lenders and servicers and negotiating more flexible repayment options. Those are the findings of an annual report from the Consumer Financial Protection Bureau.
In its second annual report on private student loan processing, released on Wednesday, the bureau analyzes more than 3,800 complaints from borrowers, with the majority targeting eight companies. The most common complaints, the report says, were related to problems with payment processing, particularly when borrowers attempted to adjust their repayment terms in times of financial hardship.
Rohit Chopra, the CFPB's student loan ombudsman, said in a call with reporters Wednesday that there are concerning similarities seen in repayment issues between the student loan market and the mortgage servicing market, when links between borrowers and their lenders "snapped" and borrowers were unable to find help.
"For many responsible student loan borrowers, they simply want to get rid of this burden and move on with their lives," Chopra said. "Many borrowers are facing stumbling blocks, snags and surprises when repaying their private student loans."
Nearly half of all complaints, collected between Oct. 1, 2012 and Sept. 30, 2013, were lodged against student lending giant Sallie Mae, which had nearly four times as many complaints against it as the next company listed. But Chopra says the high number of complaints is not surprising, given Sallie Mae's large lending platform.
Sallie Mae representatives did not directly respond to complaints about customer service in a statement to U.S. News, but said they work with borrowers who are struggling to manage payments.
"More than 90 percent of our private education loan customers are managing their payments successfully, and for those experiencing difficulty, we offer customized assistance, including modifications on more than $1 billion in private education loans," spokesperson Patricia Christel says. "We're continually seeking ways to improve our customers' experience."
The company with the next highest volume of complaints was American Education Services, at 11 percent. Other servicers included Wells Fargo, Discover, JPMorgan Chase, ACS Education Services, Citibank and KeyBank NA. Although the report only focuses on complaints from private loan borrowers, many of these companies are also involved with servicing federal student loans, and there may be a chance that those borrowers are experiencing some of the same problems, Chopra said.
Private loans often carry higher interest rates and monthly payments, and do not have the same repayment options and consumer protection measures as federal student loans. But because they're easy to get, students resort to private loans if they don't qualify for federal loans or have reached their lifetime limit for federal borrowing. Frustrated borrowers have often complained that they feel trapped in their debt because they are unable to afford monthly payments, but have no options to refinance their loans at a lower interest rate.
"Repaying a student loan should be simple," said CFPB Director Richard Cordray, in a statement. "When servicers process payments to maximize fees and penalties, they undermine the trust of their customers. Student loan borrowers deserve better; they deserve transparency and accountability."
This isn't the first time the bureau has taken issue with private lenders. Since it first began accepting student loan complaints in March 2012, the CFPB has issued several reports on the customer service issues related to private lending companies.
The CFPB in May released a report that analyzed more than 28,000 comments from the public on difficulties borrowers face with private student loans. The report described how student loan debt can have a domino effect on society, as high monthly payments can deplete borrowers' savings and prevent them from making other purchases that could improve the economy. It also made suggestions on how to ease the burden, such as creating more repayment options and a refinancing market for struggling borrowers.
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.
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.