CFPB Examines Obstacles to Repayment of Private Student Loans

Student loans are the largest source of unsecured consumer debt in the United States, surpassing credit cards. Today, outstanding student loan debt exceeds $1 trillion, with private student loans comprising more than $150 billion of this total. Responding to this growing debt burden, the Consumer Financial Protection Bureau (CFPB) recently released a report discussing the hurdles faced by borrowers in repaying private student loans. This report was prepared by the Student Loan Ombudsman, a CFPB office established by the Dodd-Frank Act to assist borrowers in filing complaints about private student loans. The Ombudsman’s report drew on approximately 2,900 complaints filed since March 2012 by students who financed their education through private student loans. According to the report, the expectations of student borrowers often diverge from the loan services they actually receive, ultimately causing students undue financial hardship. CFPB’s Director Richard Cordray observes that “graduates don’t have a fair chance to pay back their debts if they are faced with surprises, runarounds, and dead-ends.” The Ombudsman’s report draws parallels between the difficulties faced by private student loan borrowers and the problems plaguing home mortgage borrowers. Like mortgagees, the holders of private student loans often engage loan-servicers, or third-parties which collect payments from borrowers. About 65% of the complaints collected by the Ombudsman pertain to servicing problems during repayment. The report notes inordinate delays in loan servicers’ resolution of errors as well as servicers’ supply of inaccurate information about loans. Borrowers of both private student loans and mortgages have limited options for refinancing and are often unable to benefit from lower interest rates. Student borrowers find it difficult to negotiate and enroll in alternative repayment options, especially during adverse labor market conditions. Moreover, borrowers are unable to identify and contact appropriate service personnel who are likely to have information about such options. Even when borrowers manage to reach service personnel, they sometimes receive incomplete information or conflicting instructions. According to the report, borrowers’ complaints often stem from inefficient practices, a lack of information, and inflexibility in loan structuring. In addition, borrowers complain about inefficiencies and losses due to excessive paperwork, especially at the time of loan origination. Borrowers may be unaware when their loans are sold to a different lender or a change is made in the loan servicer. Moreover, when a financial institution holding a private student loan also holds the borrower’s deposit account, the lender may deduct funds from the deposit account if the borrower misses scheduled loan payments. According to the report, these deductions not only cover the missed payment but also impose overdraft fees. Some lenders charge forbearance fees even when a borrower requests forbearance due to financial difficulties. Furthermore, loan servicers often read in additional obligations that were not communicated to the borrower at the time of loan origination, according to the report. For example, many borrowers are apparently not informed of the distinctions between private and federal student loans, so they assume that benefits available in the latter, such as, repayment based on income or a discharge from repayment due to disability, are also available in the former. The Ombudsman’s report makes a number of recommendations to address borrower grievances. It urges lenders to facilitate loan modification and refinancing options, along with debt restructuring options. The report specifies that loan terms and conditions should be clear and cater to the specific requirements of private student loan borrowers. The report also recommends that lenders use technology and data-sharing to reduce inefficiencies arising out of unnecessary paperwork. The Ombudsman overall encourages the entry of new lenders and loan servicers in the market to ensure greater competition, better services, and product innovation