Debt Déjà Vu for Students

Crossposted from the Philly Inquirer

Financial institutions expect borrowers to hold up their end of the bargain when it comes to mortgages and student loans. Shouldn’t we expect the same of them?

Before this year’s mortgage settlement between regulators and large banks, there were reports of mismanagement by mortgage servicers caused great harm. Improper foreclosures reportedly wreaked havoc on families – including members of the military, hundreds of whom faced illegal foreclosures, many while they were deployed.

Student borrowers whose cases are mishandled can also suffer significant damage. A young borrower facing default and the resulting scar on her credit record could find her dreams further out of reach. Many distressed borrowers worry that they will never be able to buy a home or save enough to start a family. Some have a hard time getting work because prospective employers check their credit.

Last week, I presented a report to Congress on shoddy loan servicing practices that may not be limited to the mortgage market. Student borrowers have reported servicing detours and dead ends that bear an uncanny resemblance to the problems homeowners have faced. And as with the mortgage market, there are reports that military families also got the runaround.

The parallels run deep. As in the mortgage market, student borrowers report that some lenders engaged in aggressive marketing and risky underwriting. Now many borrowers have finished school and find that they can’t pay the bills.

Based on the complaints of borrowers, it appears that many servicers depend on being able to extract loan repayment quickly and cheaply, which works when everyone can pay. Although even struggling borrowers tend to look for ways to meet their obligations, too many feel trapped by terms and conditions that servicers won’t change.

In tough times, consumers need clarity, not confusion. While loan servicers can’t just let borrowers off the hook, they should be able to help them understand their options. But too many borrowers say they can’t get consistent answers to simple questions. Instead, they find themselves ping-ponged around departments and talking to multiple people to no avail.

Like mortgages, many student loans were packaged, sliced, and diced into securities. Sometimes consumers are the collateral damage when transfers among servicers don’t go smoothly. While consumers can’t avoid paying up by claiming they lost paperwork, it seems some servicers are using that excuse to justify poor service.

So why can’t the market solve this? When consumers get bad service at, say, a restaurant, they don’t go back. But if loan servicing is bad, consumers have to grin and bear it. They rarely get a say on whether a lender outsources its servicing, and servicers are more accountable to lenders. With few viable options for refinancing, ordinary market forces don’t apply.

Last year, total outstanding student debt crossed the $1 trillion mark, with private loans comprising $150 billion of that. With more than 850,000 private student loans in default and even more in delinquency, there is a lot of work to be done to make sure these borrowers aren’t sentenced to a lifetime of permanent financial distress.

Our student debt problem didn’t start overnight, and it won’t disappear quickly, either. But the U.S. Consumer Financial Protection Bureau has recommended reforms to assure that past risky practices aren’t repeated in the next generation.

While parents might be struggling with mortgages, let’s not forget the others caught up in the crisis. They’re entering the labor market more burdened than any generation before. That burden shouldn’t be compounded by a system that shortchanges them on basic customer service, like making sure payments are processed and records aren’t lost. We must keep an eye on the student-loan market to prevent lasting harm to a generation of borrowers and to the economy.