Student loans comprise the nation’s second largest consumer debt market, and it has skyrocketed over the last decade.
There are more than 40 million federal and private student loan borrowers, with consumers owing more than $1.2 trillion, a record high that surpasses the collective balances of credit cards and auto loans.
Moreover, the market is now facing an increasing number of borrowers who are struggling to stay current on their loans.
So the U.S. Consumer Financial Protection Bureau is launching a public inquiry into the industry that services these student loans and how they treat borrowers. The CFPB says it is seeking information on such matters as: industry practices that create repayment challenges, hurdles for distressed borrowers, and the economic incentives that may affect the quality of service.
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.
“Student debt stress can make borrowers feel like they are walking a tightrope where any false move in paying back a loan can cause them to fall,” said CFPB Director Richard Cordray. “Today’s inquiry seeks information on the pain points in student loan servicing that make repayment a more difficult and stressful process.”
A servicer is often different than the lender, and a borrower typically has no control over which company services a loan. The CFPB’s public inquiry focuses on the following:
Industry practices that create repayment challenges: The CFPB seeks information on whether consumers are harmed by billing error dispute processes, whether payments are applied in a way that maximizes fees or increases the amount of interest paid, and if the borrower receives enough information when a loan is transferred between servicers.
Hurdles for distressed borrowers: The CFPB estimates that there are nearly 8 million borrowers in default, representing more than $110 billion in balances. The agency is requesting information on whether servicers’ policies and procedures are resulting in struggling borrowers paying more fees or prolonging repayment. It seeks information on whether these policies and procedures are driving borrowers to default on their loan.
Economic incentives affecting the quality of service: The CFPB is seeking information on whether the typical ways that servicers are paid may indirectly lead to borrower harm. The model used in most third-party servicing contracts provides student loan servicers with a flat monthly fee per account serviced. This fee is generally fixed and does not rise or fall depending on the level of service a particular borrower requires in a given month. The CFPB’s inquiry seeks information on whether student loan servicers have adequate economic incentives to take the time to enroll borrowers in flexible repayment options or help them avoid default.
Application of consumer protections in other markets: For student loan borrowers, there are no comprehensive federal regulations to ensure standards for the servicing of their loans. The CFPB is analyzing whether there are protections in other consumer credit markets – such as credit cards or mortgages – that could inform policymakers and market participants when considering options to improve the quality of student loan servicing.
Availability of information about the student loan market: The CFPB is looking at whether a general lack of transparency in the market may be contributing to consumer harm. The Bureau is seeking information on whether there is adequate information available about how the market is functioning to determine whether servicers are providing help to those repaying their loans and those struggling to avoid default.