October 20, 2016
The Consumer Financial Protection Bureau (CFPB) estimates there are nearly 8 million federal and private student loan borrowers in default, representing more than $110 billion in owed balances. Millions more are falling behind and struggling to repay their loans. These borrowers may need additional support from servicers to understand and access their repayment options and avoid default. In the last year, student loan debt collection has recently caught the attention of the CFPB, similar to an issue in which the Federal Trade Commission (FTC) is focusing. This impacts the For-Profit education market due to a large percentage of the past student population being in, or at risk of, default.
Toward the end of 2015, the CFPB released a report outlining widespread servicing failures reported by both federal and private student loan borrowers. Consumers describe companies using 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. The Bureau has made it a priority to take action against companies that are engaging in illegal servicing practices. The Bureau also intends to explore potential industry-wide rules to increase borrower protections. This work builds on an interagency framework for market-wide reform released in coordination with the U.S. Department of Education and the U.S. Department of the Treasury.
“With one out of four student loan borrowers struggling to repay their loans or already in default, cleaning up the servicing market is critical,” said CFPB Director Richard Cordray. “(The) report underscores the need for market-wide student loan servicing reforms to halt harmful practices and boost assistance for distressed borrowers.”
In May, the CFPB launched a public inquiry into student loan servicing practices that may make paying back loans a stressful or harmful process for borrowers. The CFPB also sought input on potential solutions to improve service for student loan borrowers in repayment. In response to the public inquiry, the Bureau received over 30,000 public comments.
Recommendations for Reform:
- Create consistent, industry-wide standards for the entire servicing market
- Hold servicers accountable
- Provide access to clear, timely information
- Improve publicly available data
The CFPB’s focus on student loan servicing, should see consent orders or contested enforcement actions. To date, the CFPB has brought multiple enforcement action concerning student loan servicing, and has flagged student loan servicing issues in its Supervisory Highlights publication. The agency has identified student loan servicing as one of its priorities over the next two years. With actions already levied against four companies, 2016 is looking like the year of student loan servicing enforcement at the CFPB.
Student loan borrowers can get advice on student loan repayment options by using the CFPB’s Repay Student Debt tool. This interactive resource offers a step-by-step guide to navigate borrowers through their repayment options, especially when facing default. The new version of this tool, launched last year, provides borrowers with sample instructions to send to their student loan servicer to protect themselves against payment processing problems and auto-defaults. It also has information about how to request a lower monthly payment when experiencing financial distress. Student loan borrowers experiencing problems related to repaying student loans or debt collection can also submit a complaint to the CFPB.
In our opinion, this is good news for the For-Profit sector as these actions could push loan processors to educate the borrowers as to their repayment options to stay out of default. With the ultimate goal of assisting the consumer in understanding their options before they default and being able to “side step” additional fees and costs associated with their debt, this is seen as a positive step in government intervention.
If you’d like to discuss further how the regulatory spotlight on loan processors may impact your school, please email me at firstname.lastname@example.org.
This article was written with excerpts from CFPB news releases in 2015 and 2016 as well as consumerfinance.gov and “NerdWallet”.