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CFPB Launches Inquiry into Student Loan Servicing
Tuesday, May 19, 2015 6:25 AM

The Consumer Financial Protection Bureau is taking a closer look at companies that service student loans to determine whether there are patterns of abuse and misinformation in the $1 trillion industry.

CFPB Director Richard Cordray said the agency had been alerted to potential billing problems, lost records, delays in resolving errors, and generally poor customer service at the hands of student loan service providers.

The inquiry is focused on a handful of specific areas: practices that hamper repayment or make repayment more expensive; repayment options available to distressed borrowers; whether payment incentives are negatively affecting service; and the availability of information about and application of borrowers' rights and protections that are available in other loan markets.

The agency said that roughly 8 million student loan customers are in default on their debts, and the inquiry is probing whether "servicers' policies and procedures are resulting in struggling borrowers paying more fees or prolonging repayment" or whether the policies "are driving borrowers to default on their loan" in the first place.

The CFPB's inquiry comes as regulators and lawmakers are increasingly concerned about the size of the nation's outstanding student loan debt. In prepared remarks for a field hearing on the subject scheduled for Thursday, Cordray said that student loans represent the largest category of consumer debt besides mortgages, with two out of three undergraduates finishing their programs in debt.

Cordray likened the growth in student loan debt to the growth in mortgage debt immediately preceding the 2008 financial crisis, and said that consumers find debt service providers' ability to meet their needs inadequate.

Federal Reserve Board Chair Janet Yellen said in a speech last November that student loan debt had grown from $260 billion in 2004 to more than $1.1 trillion 10 years later — a trend that could "make it harder for many young people to take advantage of the opportunity higher education offers."

Senator Richard Durbin, R-Ill., has introduced a bill that would amend federal bankruptcy law to allow private student loans to be discharged if a borrower cannot pay. The industry is vigorously opposed to the bill, arguing it would drive up costs and make credit more expensive.