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Consumer advisory: Stop getting sidetracked by your student loan servicer

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Over the last several years, many Americans have been able to save on monthly payments on their mortgages and other loans by refinancing to the low interest rates available in the market.

Unfortunately, with few refinancing options, many student loan borrowers tell us they feel stuck in loans with high rates, well after they’ve graduated and landed a job.

Since many borrowers can’t refinance, one of the only ways to avoid paying unnecessary interest is to pay their high-rate loans off more quickly. According to the Truth in Lending Act, your lender or servicer cannot assess any penalties or fees if you prepay your private student loan.

Recently, we released a report that describes how the payment processing policies of private student lenders and loan servicers may be sidetracking responsible borrowers looking to pay off their loans more quickly. If you have several loans associated with the same loan servicer (the company that sends you a bill each month) and you don’t provide instructions, your servicer will generally decide how to allocate your payments in excess of the amount due.

Leaving this decision up to them isn’t always the best choice.

Your student loan servicer should listen to your instructions about which loan your additional payment goes toward when you submit your payment.

Here’s why providing instructions to your servicer can be a good idea:

  • If you direct any extra money to your highest interest rate loan first, you may save hundreds of dollars or more in extra interest payments and you may be able to get out of debt faster.
  • If you don’t tell them what to do, your servicer will apply extra payments as they see fit, in most cases spreading your money out across all of the loans on your account.
  • This means that you’ll pay down your debt slowly, and you’ll pay more money in interest over the life of your loan.

To help you explain to your servicer what it should do with your money, we’ve put together some sample instructions you can send to your servicer to ask them that they direct any extra payments toward your highest-rate loan. Helpful servicers will generally accommodate your request. You’ll want to be sure your servicer responds to your request so you know if you need to send additional instructions.

You can download a sample letter to mail to your servicer, or you can use the text below to provide instructions using the “Send a Message” or “Contact Us” feature when you log into your account on the servicer’s website:

I am writing to provide you instructions on how to apply payments when I send an amount greater than the minimum amount due. Please apply payments as follows:

  1. After applying the minimum amount due for each loan, any additional amount should be applied to the loan that is accruing the highest interest rate.
  2. If there are multiple loans with the same interest rate, please apply the additional amount to the loan with the lowest outstanding principal balance.
  3. If any additional amount above the minimum amount due ends up paying off an individual loan, please then apply any remaining part of my payment to the loan with the next highest interest rate.

It is possible that I may find an option to refinance my loans to a lower rate with another lender. If this lender or any third party makes payments to my account on my behalf, you should use the instructions outlined above.

Retain these instructions. Please apply these instructions to all future overpayments. Please confirm that these payments will be processed as specified or please provide an explanation as to why you are unable to follow these instructions.

Thank you for your cooperation.

You’ll want to save the message you sent for your records.

For most borrowers, it makes sense to direct any extra payment toward your loan with the highest interest rate – this is the fastest way to save the most money over the long term. For other borrowers, saving the most money might not be their main goal. You may be interested in paying extra each month on certain loans in order to improve your credit profile, qualify for a mortgage, or eliminate a monthly bill. You should weigh all of your options.

You can also submit a complaint online.

If you have questions about repaying student loans, check out our Repay Student Debt tool to find out how you can tackle your student loan debt.

For more information on private student loans and other consumer financial products or services, visit Ask CFPB.

Explainer: scoring student loan servicers

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This fall, college graduates across the country will start to send payments on their student loans to their servicers. Loan servicers are companies that collect payments on all sorts of loans, including mortgages, auto loans, and student loans. Sometimes, the original lender will be the one collecting payments. But often, a loan servicer is chosen for you by the lender.

For the bulk of student loans, there’s a fairly unique process to determine who services new loans in the Department of Education’s Direct Loan program. Loan volume is assigned based on how satisfied users are with the servicer, in addition to how well the servicer is at collecting payments and avoiding borrower default. In other words, servicers get more volume if borrowers, schools, and federal personnel give them high ratings and if they are successfully getting borrowers to pay.

We decided to take a closer look at how new volume is awarded to the four largest Direct Loan servicers by analyzing the Servicer Performance Reports released to the public each quarter. These four nonbank servicers are scored on five measures, and they’re graded on a curve.

Scores on each of these equally-weighted categories determine the allocation of new Direct Loan volume to servicers. The final Servicer Performance Report of the year was recently released. Here are the results over the past year.

Servicer performance by metric and by quarter 2012-2013


Servicer Loan defaults (by number of loans) Loan defaults
(by dollar value)
Borrower survey School survey Federal personnel survey
2012-13 Academic Year, First Quarter
FedLoan Servicing (PHEAA) 1.21% 0.71% 74.33 78.00 72.00
Great Lakes 1.46% 0.86% 74.67 83.33 72.00
Nelnet 0.66% 0.40% 72.67 77.33 68.00
Sallie Mae 0.91% 0.56% 73.00 74.00 69.00
2012-13 Academic Year, Second Quarter
FedLoan Servicing (PHEAA) 1.42% 0.91% 75.00 79.33 73.00
Great Lakes 1.70% 1.04% 77.00 77.33 74.00
Nelnet 0.76% 0.48% 75.00 78.33 71.00
Sallie Mae 0.83% 0.49% 72.00 73.33 66.00
2012-13 Academic Year, Third Quarter
FedLoan Servicing (PHEAA) 0.98% 0.58% 73.33 81.33 76.00
Great Lakes 1.03% 0.65% 74.67 83.00 72.00
Nelnet 0.58% 0.36% 77.33 74.00 71.00
Sallie Mae 0.64% 0.37% 74.00 77.00 69.00
2012-13 Academic Year, Fourth Quarter
FedLoan Servicing (PHEAA) 0.91% 0.52% 73.67 77.00 78.00
Great Lakes 1.11% 0.63% 75.67 82.67 76.00
Nelnet 0.59% 0.35% 74.00 77.67 70.00
Sallie Mae 0.54% 0.29% 73.67 78.00 75.00

Now, let’s take a look at the overall rankings for the whole year. A ranking of first means a servicer was the best of the group, and a ranking of fourth means a servicer was the worst of the group in a particular category. Again, these scores are rankings, so first doesn’t mean the servicer is “good,” nor does fourth mean the servicer is necessarily “bad.”

Servicer Rank by Metric 2012-2013


Servicer Loan defaults (by number of loans) Loan defaults
(by dollar value)
Borrower survey School survey Federal personnel survey
Nelnet 1st 1st 2nd 3rd 3rd
FedLoan Servicing (PHEAA) 3rd 3rd 3rd 2nd 1st
Great Lakes 4th 4th 1st 1st 2nd
Sallie Mae 2nd 2nd 4th 4th 4th

Note: First represents the highest ranking for a given metric, fourth represents the lowest ranking.

As shown above, Great Lakes performs the best overall when it comes to borrower and school satisfaction, but the worst when it comes to loan performance. Sallie Mae ranks the worst in borrower, school, and federal personnel satisfaction. Nelnet scores the best on loan performance, but sits in the middle of the pack on the satisfaction surveys.

The Department of Education publishes a formula on how it converts these scores to new volume. Based on these results, it appears that Nelnet will get the highest allocation of new servicing volume of these four servicers, while Sallie Mae will receive the lowest.

What if you don’t like the servicer who is assigned to your loan? While you generally can’t call and request that your loan is switched to a specific servicer, there are some triggers that could lead to a servicer change. For example, with federal student loans, if you “consolidate” multiple types of federal student loans or submit a certification form for loan forgiveness, you might find that you have a new servicer.

We have already begun to supervise both banks and nonbanks in the mortgage servicing industry. Last month, we released a report about what our examiners have been finding, including sloppy account transfers, poor payment processing, and loss mitigation mistakes. We’ve received complaints about similar issues from private student loan borrowers, including complaints about significant problems experienced by military families.

In March of this year, we proposed supervising nonbank student loan servicers to address potential problems and hold financial institutions accountable if they break the law.

If you’re one of the many who are about to face your first student loan bill after graduation, we can help you learn more about your repayment options. Check out our Repay Student Debt tool to learn more. And if you are facing a specific problem on your private or federal student loan, you can file a complaint. Good luck!

Rohit Chopra is the CFPB’s Student Loan Ombudsman. Learn more about student loan performance data.

Reminder: Accessing your scholarships and student loan funds

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Earlier this year, the Federal Deposit Insurance Corporation, another banking regulator we work closely with, fined one of the largest providers of campus debit cards. We issued this consumer advisory to all students expecting to receive scholarship and student loan proceeds onto – what appears to be – a school-endorsed debit card.

Many college students, especially those enrolled in community colleges or who live off-campus, receive scholarships, grants, and student loans that are for more than the cost of their tuition. These funds help them pay rent, get to and from school, and cover other costs, like textbooks. Many schools work with third-party financial companies to disburse these funds directly to students.

Consumers should remember the following:

  • You can’t be required to use a specific bank or card. There may be a financial institution that operates on your campus, but you generally can’t be required to use a specific account or card to access your student aid. If you have received a federal student loan, your school must provide a paper check or cash option.
  • Consider choosing an account before arriving at school. Shop around, and don’t feel limited by the banks operating ATMs on or near campus. Some financial institutions don’t charge you for using any ATMs, and some will automatically reimburse you for fees charged for using an out-of-network ATM. Many institutions also provide a mobile phone app to remotely deposit paper checks.
  • If your school offers it, sign up for direct deposit as soon as possible. If your school offers direct deposit, you may be able to provide the school with your account information in order to access your funds more quickly.

If you have a specific problem with your student checking account and need to resolve it, please file a complaint. If you want to just share your experience with student checking accounts and debit cards, tell us your story and use the tag “financial aid.”

Ask CFPB if you have more questions about student checking accounts.

Share this post on Facebook and Twitter, and we look forward to hearing from you.

A closer look at the trillion

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A few weeks ago, we released new estimates on the size of the student loan market, which is approaching $1.2 trillion, with federal student loans crossing the $1 trillion mark. While there’s been a lot of discussion about changes to federal student loan interest rates on new loans, many of you have asked: what’s happening with the trillion that’s already been borrowed?

We took a closer look and here’s what we found: there are over 7 million borrowers in default on a federal or private student loan. We also estimate that roughly a third of Federal Direct Loan Program borrowers have chosen alternative repayment plans to lower their payments.

To learn more, we decided to analyze data released from the Department of Education, pulled from the National Student Loan Data System. We took a close look at the Federal Direct Loan and the Federal Family Educational Loan (FFEL) Programs. Federal loans also include the campus-based Perkins Loan program, which represent less than 1% of the total outstanding. The data below represent loan status as of June 2013.

Repayment status for federal student loan programs

Outstanding balance including accrued interest in billions of dollars

In-school Grace Repayment Deferment Forbearance Default Other Total
Direct 133.8 (24%) 40.4 (7%) 237.4 (42%) 75.6 (13%) 48.3 (8%) 30.5 (5%) 3.2 (1%) 569.2 (100%)
FFEL 12.2 (3%) 6.6 (2%) 256.3 (60%) 46.5 (11%) 42.8 (10%) 58.8 (14%) 6.3 (1%) 429.5 (100%)

Number of recipients in millions

In-school Grace Repayment Deferment Forbearance Default Other Total
Direct 7.9 (28%) 1.9 (7%) 10.8 (39%) 3.2 (12%) 1.8 (6%) 2.1 (8%) 0.1 (0%) 27.8 (100%)
FFEL 0.9 (4%) 0.5 (2%) 12.9 (56%) 2.3 (10%) 1.6 (7%) 4.4 (19%) 0.3 (1%) 22.9 (100%)

It’s hard to compare the Direct and FFEL programs to each other, since a much larger portion of Direct Loan borrowers are still in school. In addition, no new loans have been made through the bank-based FFEL program since 2010. Many borrowers have both types of loans. Here’s a closer look at the estimated average balance for borrowers in each loan status:

Average balance by repayment status for federal student loan programs

Outstanding balance including accrued interest in thousands of dollars

In-school Grace Repayment Deferment Forbearance Default
Direct 16.9 21.3 22.0 23.6 26.8 14.5
FFEL 13.6 13.2 19.9 20.2 26.8 13.4

A noteworthy number of borrowers are in default. Defaulting on a federal student loan has serious consequences. Unlike other consumer credit, borrowers in default on a federal student loan might see their tax refund taken and their wages garnished without a court order. However, there are options to get out of default and get the default notation on your credit report removed.

There are ways to avoid default on a federal student loan, even when you think you can’t afford your payment. Here’s a closer look at the repayment plans Direct Loan borrowers are choosing:

Repayment plan choices by federal direct loan borrowers

Includes loans with known status in repayment, deferment, and forbearance

Outstanding balance
Billions of dollars
Recipients
Millions of recipients
Average balance
Thousands of dollars
Standard 10-year plan 139.9 9.84 14.2
Plans based on income 72.3 1.58 45.8
Income-contingent repayment 20.1 0.63 31.9
Income-based repayment 50.9 0.91 55.9
Pay as you earn 1.3 0.04 32.5
Plans not based on income 107.4 3.35 32.1
Extended repayment 62.1 1.63 38.1
Graduated repayment 27.8 1.27 21.9
Extended graduated repayment 17.5 0.45 38.9
Other alternative repayment plan

4.4 0.23 19.1
Total of loans in these plans 324 15 21.6

Borrowers looking to reduce their payments can choose a plan where their monthly payment can be tied to a portion of their income after submitting documentation. The newest of these plans is Pay As You Earn, where your payment is equal to roughly 10 percent of your income above the poverty line. After 20 years, any remaining balance you might have is forgiven.

There are also plans that allow you to extend your payments over a longer time period (extended repayment) or to have your payments increase over time (graduated repayment). You can also combine both features (extended graduated repayment). All of these plans will incur more interest over the life of the loan, but don’t require much documentation to enroll in.

Roughly a third of Direct Loan borrowers in repayment, deferment, or forbearance are enrolled in an alternative repayment plan. Most of these borrowers are enrolling in plans that don’t require income documentation. Based on the average balances we estimate for borrowers in each plan, it’s possible that many borrowers in plans not based on income might be better off with an income-based plan. If borrowers were aware of and able to easily enroll in income-based plans through their servicer, many federal student loan defaults could have been avoided.

We recently released a report that analyzed input from consumers, industry, and experts about the potential impacts of unmanageable student loan debt and how to spur affordable repayment and refinance options for private student loan borrowers.

We’ll keep monitoring the student loan market to understand how it’s working and to help consumers navigate a complicated system. To learn more about student loans, check out Ask CFPB. You can also check out reports and other information on our work for students, visit consumerfinance.gov/students.

Rohit Chopra is the CFPB’s Student Loan Ombudsman.

What we’re hearing from private student loan borrowers

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Today, we released a mid-year update analyzing complaints from private student loan borrowers. The update explores some of the challenges consumers face when dealing with their lenders and servicers.

Last October, we published a report that detailed problems reported by borrowers. We found that student loan borrowers expressed frustration about their lack of repayment options and their inability to refinance or modify their loans. In addition, we saw many examples of active-duty servicemembers having difficulty accessing benefits under the Servicemembers Civil Relief Act (SCRA).

Lenders and servicers reported that these publications provided a helpful roadmap on ways to improve customer service.

Since then, consumers have voiced some of the same concerns, but we have also identified some emerging challenges. Complaints submitted since October revealed borrowers had a number of concerns about processing of payments, obtaining documentation about their loans, finding accurate information about their loan status and repayment options, and accessing basic account information.

While some lenders and servicers are addressing concerns about difficulties faced by military borrowers, the problem has not gone away. Regrettably, we continue to receive complaints from servicemembers with student loans having trouble accessing benefits under the SCRA.

Read the full mid-year update.

Having trouble repaying a student loan? Check out our Repay Student Debt tool. To learn more about our work for students and young Americans, visit consumerfinance.gov/students.

Consumer advisory: You don’t have to pay someone to help with your student loan

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You told us about a number of debt relief companies that promise thousands of dollars in savings on borrowers’ student debt – an offer that may seem too good to be true. Borrowers sometimes think that the quickest way to deal with their student loan debt is to pay someone to contact their creditor. When it comes to federal student loans, this probably isn’t the best choice.

Here’s why:

  • Enrollment in alternative repayment programs, like Income-Based Repayment (IBR), is available at no cost to federal student loan borrowers.
  • Debt relief companies do not have the ability to negotiate with your creditors in order to obtain a “special deal” under these federal student loan programs. Payment levels under IBR and other federal income-driven repayment plans are set by federal law.
  • Any claims by debt relief companies to the contrary may be misleading and potentially a violation of law.

If you have questions about repaying student loans, check out our repayment tool Repay Student Debt to find out how you can tackle your debt – even if you’re in default. You can learn about your options, and what you might want to specifically ask for when speaking with the company attempting to collect from you. Another great resource to visit is Ask CFPB for answers on many more of your student loan questions.

Even if you’ve fallen behind, you may have options. There are even federal student loan repayment programs that can help remove the default status from your credit report. Be sure to learn about what’s available through our tools before paying hefty fees for something you can get for free.

Still need help resolving a student loan issue? File a complaint.

Rohit Chopra is the CFPB’s Student Loan Ombudsman. To learn more about the CFPB’s work for students and young Americans, visit www.consumerfinance.gov/students.