The Weak Link in the Student Loan Chain

With student debt levels exploding in the U.S. it’s not good to hear that borrowers are encountering servicing problems. But that’s just what the government’s the Consumer Financial Protection Bureau found is happening.

Loan servicing failures are widespread, and on the rise, CFPB said in a new report.

The companies that service student loans utilize, “… a wide range of sloppy, patchwork practices that can create obstacles to repayment, raise costs, cause distress, and contribute to driving struggling borrowers to default,” according to CFPB.

Loan servicers act as the “mid life” contact for borrowers. They take over once the loan has been originated by another company.

As CFPB put it, “servicers manage borrowers’ accounts, process monthly payments, and communicate directly with borrowers. When facing unemployment or other financial hardship, borrowers must contact student loan servicers to enroll in alternative repayment plans, obtain deferments or forbearances, or request a modification of loan terms.”

Most of the time, the borrower has had no prior relationship with the servicer, and did not choose the servicer when negotiating the original loan.

So, students get a loan from one company, and wind up making their loan payments to a separate one that they have no prior relationship with.

The originator of the loan assigns the servicing to another company, and takes no responsibility for whether the borrower is well taken care of. This can lead to problems, including some shady practices.

Many consumers reported to the CFPB that servicers are failing to provide the basic level of service necessary to meet borrowers’ needs.

Consumers and other stakeholders report problems such as servicers losing paperwork or misapplying payments. Borrowers say that when errors arise, they find it difficult to have them corrected.

The CFPB is working to improve the borrower experience, and has made a series of recommendations toward that end. They can be found HERE.

It is important that student borrower needs be met, since this type of debt has grown tremendously in recent year.

The CFPB said that student loans now make up the nation’s second largest consumer debt market. The total volume of outstanding student loans has more than doubled, rising from less than $600 billion in 2006 to more than $1.2 trillion today.

One in four student loan borrowers are currently in default or struggling to stay current on their loans, despite the availability of income-driven repayment options for the vast majority of borrowers.

With these kinds of number in play, it’s no exaggeration to say that failures in the student debt market could have a powerful impact on the financial system, and the economy.

It is important that student borrowers are dealt with fairly, and given the opportunity to keep their loans current during times of financial stress.