Getting the Loan Was Easier: The Challenges of Student Loan Servicing
As an independent agency of the United States government, the Consumer Financial Protection Bureau (CFPB), formed on July 11, 2012, is responsible for protecting the interests of consumers in financial matters. Its jurisdiction includes banks, payday lenders, mortgage lenders, debt-collectors and other companies whose work touches on the financial health of American consumers.
As part of their continuing efforts to protect and inform American consumers, the CFPB produces and distributes a wide-range of reports on a variety of topics. The instant report is product by Seth Frotman, the Student Loan Ombudsman for the CFPB, and analyzes more than 3,500 private student loan complaints, 2,400 federal student loan servicing complaints and approximately 1,500 debt collection complaints related to private and federal student loan debt handled between October 1, 2015 and May 31, 2016. The results are below.
The broad sweep of the data presented in the CFPB report highlighted a number of areas where borrowers continued to experience frustration. The report notes complaints from borrowers related to a range of loan-servicing concerns, including:
- Payment processing/handling,
- Servicer communications
- Difficulty in accessing valid information about income-driven repayment (IDR) plans
- Receiving conflicting information about eligibility criteria to enroll in IDR programs
- “Auto-defaulting” a servicer places a loan in default upon the death or bankruptcy of a co-signer, even when the borrower has been making full, on-time payments each month.
This report focuses on the problems that borrowers face when enrolling in an IDR, and provides options for policymakers and market participants to better serve student loan borrowers.
Since 2009, federal law has allowed student loan borrowers to tie their monthly student loan payments to their income. As a result, borrowers who are unemployed or earn very little can pay as little and $0/month on these IDR plans.
It is easy to see why the IDR plans would be popular, and this report finds that while trying to take advantage of such programs many borrowers are relying heavily on student loan servicers to:
- Inform them of the availability of IDR options
- Help them process the necessary paperwork to facilitate borrower-enrollment.
However, instead of finding the process streamlined, borrowers reported:
- Poor customer service
- Unexpected delays
- Lost paperwork
- Inconsistent/inaccurate processing
As a result of these obstacles, consumers complain that they have:
- Increased unnecessary costs
- Reduction of benefits from the use of IDR programs
- Unnecessarily extended repayment terms.
This is not the first time the CFPB has examined the issues surrounding student loan repayment. The CFPB has outlined consumer complaints surrounding the information they received about repayment options from servicers, and has raised the potential that consumers are missing out on long-term benefits like IDR in favor of short-term solutions like forbearance . The CFPB has also outlined consumer complaints related to verification of income and family-size once enrolled in a repayment program, and has raised the potential of wasted consumer time and money .
The current report takes another look at student loan servicers and the process-delays that frustrate consumers and threaten their continued satisfaction with the system. Let’s take a look at some specifics:
Consumers reported IDR application processing delays lasting weeks or months. The enrollment process (including income and family-size verification) can stretch over a long period of time. As a result of these delays, borrowers may lose out on opportunities to lower their monthly payments and save on interest charges. Those delays also put off the opportunity for loan payoff/forgiveness.
Even those borrowers who apply for IDR online at www.studentloans.gov report costly and cumbersome delays despite the fact that student loan servicers are removed from the initial part of the application process and need only verify the information provided.
There were also complaints from consumers (eligible borrowers) describing haphazard results from their efforts to complete their IDR applications.
- Some servicers rejected applications without the opportunity to remedy shortcomings.
- Consumers reported feeling that murky application processes tended to discourage (instead of encourage) participation in IDR plans. Clumsy or flawed IDR enrollment practices meant borrowers were less likely to obtain an affordable repayment option.
- Furthermore, consumers report unexpected rejections of their applications (leading to higher payments, increased interest, etc.) when relying on their student loan servicer to evaluate and finalize their IDR applications and supporting documentation.
The CFPB report chronicles these consumer concerns, and makes important recommendations to attempt to address those concerns. Unsurprisingly, the report recommends direct action from student loan servicers, both in the role they must play to incorporate “industry standards” that may inform their practices, and in their direct business practices. The CFPB recommends servicers:
- Incorporate the July 2016 Department of Education policy guidance  that was issued as an attempt to strengthen their IDR application plans and procedures.
- Consider developing and distributing clear, actionable instructions to consumers on how to clarify deficiencies in IDR applications, and then provide adequate time for consumers to provide corrections. The goal being for those consumers to be able to stay on track to clarify any details necessary to the successful completion of the IDR application process.
- CFPB also developed a prototype Income-Driven Repayment Application Fix-it Form as an exemplar for both consumers and servicers .
Finally, the CFPB calls for lawmakers to take action in order to make servicer-specific metrics related to application handling, processing time and borrower outcomes under the range of IDR plans publicly available. These metrics would allow both lawmakers and market participants to better focus their limited resources and work toward establishing concrete industry standards. See http://files.consumerfinance.gov/f/201509_cfpb_student-loan-servicing-report.pdf.  See http://www.consumerfinance.gov/about-us/blog/when-you-make-student-loan-payments-on-an-income-driven-plan-you-might-be-in-for-a-payment-shock/.  See http://www2.ed.gov/documents/press-releases/loan-servicing-policy-memo.pdf.  Included as an Appendix to the report.