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Troubled Student Loan Borrowers Get Little Help, CFPB Says
Friday, October 17, 2014 6:30 AM

Borrowers stuck with oppressive private student loan debts continue to get little mercy from lenders, which is bad for both consumers and the financial institutions, according to a report issued Thursday by the Consumer Financial Protection Bureau.

The CFPB report, issued to fulfill an annual requirement by Congress, is based on 5,300 complaints filed with the CFPB during the past 12 months, which the agency says is a 38 percent increase from the previous 12-month period. They estimate that there is $1.2 trillion in outstanding private and federal student loan debt, with more than 7 million Americans in default.

While distressed mortgage holders have several opportunities to appeal for lower monthly payments and federal student loan borrowers can extend the terms of the loans by 10 years or more, most private borrowers are stuck with either making the entire payment or defaulting.

CFPB student loan ombudsman Rohit Chopra said that the most risky lending practices from the last decade had largely disappeared, but consumers who attended school during that time were still suffering from the consequences and getting little help.

"The response by the private student loan industry to distressed borrowers is failing to help them avoid default," said Chopra. "Too many borrowers are barely treading water, losing hope that these companies will throw them a lifeline."

The report said that complaints are broad, and even borrowers who tried to pay more than their required monthly payments ran into conflicts with servicers.

"Many consumers who wished to pay down their loans more quickly found that student loan servicers allocated payments in ways that might maximize the amount of total interest the borrower would pay, slowing him or her down on the path to being debt-free," the report said.

But by far, the most complaints concerned consumers looking for alternatives to oppressive monthly loan payments. According to the CFPB, the top complaints included:

  • Little information on ways to avoid default: Many borrowers said they were unaware of what loan modifications were available and what the criteria for qualifying were. The information was not readily available on these lenders’ or servicers’ websites. Many struggling borrowers also reported receiving conflicting or inaccurate information as they were bounced between multiple customer service representatives.
  • No affordable loan modifications available: Federal student loan borrowers are entitled, by law, to a range of affordable loan modification options, including income-based repayment, extended loan terms, and plans that start with a small payment and increase over time. These same options are not available for private student loan borrowers. Instead, consumers complained that private student lenders and servicers tell them that they are not eligible for any affordable repayment plan that would allow them to avoid default.
  • Temporary fixes that only delay default: Borrowers reported that while many private student lenders and servicers do not offer affordable repayment plans, some may offer temporary forbearance. This short-term fix may delay default by giving borrowers a brief period where no payment is due, often just a few months. Even for these temporary forbearance options, though, borrowers complain of burdensome enrollment fees and processing delays, sometimes leading to surprise defaults.

The report criticized private student loan servicers, but did not mandate specific changes, instead issuing a series of recommendations.

Chopra stressed that both servicers and borrowers would be better off if former students were allowed to lower their payments by extending the terms of their loan, lower their interest rates, or receive principal relief. So far, financial institutions have been slow to adopt that stance. Meanwhile, defaulting on student loans can do considerable damage to a borrower's credit, which can make it difficult to qualify for other loans or credit down the road.

"Regulators and policymakers have encouraged lenders to constructively engage with borrowers to find workout solutions," the report said. "Despite commitments by a number of major market participants to expand alternative repayment options, consumers continue to encounter limited or no flexibility when seeking help from their lender or servicer."