WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman released a report projecting that over the next two years, one-in-three rehabilitated student loan borrowers could be driven back into default due to gaps between student loan programs. The report examines debt collection and servicing problems plaguing the federal programs designed to help millions of defaulted student loan borrowers get on track and into affordable repayment plans. The Bureau estimates that the breakdowns along the path out of default will cost borrowers hundreds of millions of dollars, including over $125 million in unnecessary interest charges over the next two years. The Bureau is calling for an overhaul of these programs in order to help improve the recovery process for distressed consumers.
“The consumer protections promised under federal law should make it nearly impossible for the most vulnerable consumers to be trapped in default,” said CFPB Director Richard Cordray. “Today’s report shows that far too many of these borrowers continue to fall through the cracks of a flawed student loan system."
“Too many student loan borrowers are being left behind due to breakdowns in the federal programs designed to provide them a fresh start, including an affordable monthly payment and a path to long-term success,” said CFPB Student Loan Ombudsman Seth Frotman. “This report offers further evidence that industry practices and needless red tape can turn a student loan into an unbearable burden. Policymakers should work to reform the programs that are failing those borrowers that need help most.”
The student loan market has grown rapidly in the last decade with about 44 million Americans now owing money. The CFPB estimates that the combined total for outstanding federal and private student loan debt has reached roughly $1.4 trillion, with the vast majority from federal loans. The Department of Education estimates that more than 8 million student loan borrowers have gone at least 12 months without making a required monthly payment and have fallen into default. Nearly 1.2 million of these borrowers defaulted in the past year. These borrowers face negative consequences such as wage garnishment, loss of federal benefits, and negative credit history.
Today’s report examines red tape, breakdowns, and communications gaps across the two federal programs designed to help struggling borrowers get out of default and into affordable repayment plans.
Federal law gives most borrowers in default the right to “rehabilitate” their loan – a process for borrowers to get out of default and get back on track by making a series of payments, which can be set based on income, to a debt collector. The majority of borrowers who rehabilitate and get out of default are eligible to enroll in an income-driven repayment program through their loan servicer. These repayment plans are tied to income and family size and can be as low as zero dollars per month. They can help struggling borrowers stay out of default over the long term.
Consumers have complained to the CFPB about every step of the process for getting out of default and into an affordable repayment plan. These borrowers report a range of debt collection and servicing breakdowns across these programs. Key issues facing borrowers include:
- One-in-three rehabilitated borrowers will re-default within two years due to servicing and program failures: The Bureau estimates over 200,000 struggling borrowers will needlessly redefault over the next two years despite qualifying for a zero-dollar payment under income-driven plans. Among other costs, these borrowers will rack up over $125 million in unnecessary interest charges because of lost interest subsidies they would have access to under an income-driven plan. Borrowers report encountering delays and dead ends when applying for income-driven plans that feature interest subsidies and loan forgiveness. The Bureau estimates that these practices will drive hundreds of thousands of rehabilitated borrowers back to default, despite their eligibility for income-driven plans.
- Debt collection practices delay or derail borrowers seeking to get out of default: Borrowers report debt collectors setting incorrect monthly payment amounts and having problems verifying income levels. After months of making payments, consumers report finding out that payments were not applied toward the loan rehabilitation process. These breakdowns can derail borrowers seeking to get out of default and increase interest charges on their loans.
- Misaligned debt collection incentives do not support long-term success: Today’s report observes that collectors’ economic incentives do not encourage long-term success. Through the federal loan rehabilitation program, debt collectors are paid as much as $40 for every dollar they collect from struggling borrowers, even if borrowers wind up back in default. Consumer complaints reveal that collectors may focus on short-term borrower outcomes — quickly completing a nine-month rehabilitation process — but fail to provide important information about how to stay on track over the long term.
- Communication gaps cause consumer confusion and payment shock: Borrowers report problems resulting from collectors’ and servicers’ failure to communicate when transferring a borrower out of default. Borrowers report receiving conflicting information about their expected monthly payments, as well as where to send payments, what amount to pay, and how those payments will be applied to their loan balance. Borrowers who rehabilitated a defaulted loan report a payment shock when their servicer bills them for hundreds of dollars more per month than what they arranged with the debt collector. Borrowers who aren’t able to navigate getting on an income-driven plan may be driven back into delinquency and default.
Reforming the path out of default and into an affordable payment plan
The Dodd-Frank Wall Street Reform and Consumer Protection Act instructs the Bureau’s Student Loan Ombudsman to offer recommendations to the CFPB Director, the Secretary of Education, the Secretary of the Treasury, and to Congress. As part of today’s report, the Student Loan Ombudsman called for an overhaul of the broken process for borrowers to get out of default and back on track. The Student Loan Ombudsman offered recommendations to policymakers and industry to improve the recovery process for the most vulnerable student loan borrowers. These recommendations include:
- Streamline and simplify the pathway from default to affordable repayment plans: Today’s report observes that the rehabilitation program was designed as a feature of the bank-based guaranteed student loan program — a program terminated in 2010 — and has not undergone significant changes in more than two decades. The Bureau urges policymakers to streamline and simplify the process for consumers in default to recover and enroll in income-driven repayment plans.
- Take immediate action to prevent vulnerable borrowers from slipping through the cracks: Policymakers and the servicing and collections industries should take immediate action to address the problems outlined in this report, including improving consumer communications, realigning economic incentives so that debt collectors and servicers work to promote borrowers’ long term success, and improving access to servicing data on the performance of previously-defaulted borrowers.
The Bureau is also working to better evaluate and address practices affecting student loan borrowers struggling to get out of default and back on track. Today the Bureau’s Student Loan Ombudsman also sent to student loan servicers a seeking new information on how previously-defaulted borrowers perform over time. This information can help the Bureau to assess how current practices intended to assist these at-risk borrowers may differ among companies. The Bureau previously highlighted how inconsistent practices across servicers can cause significant problems for borrowers, calling for industrywide servicing standards in this market.
Today’s report was informed by consumer complaints submitted to the CFPB between Oct. 1, 2015 and May 31, 2016 about nearly 300 companies, including student loan servicers, debt collectors, private student lenders, and more. The Bureau handled approximately 5,500 private student loan complaints, and 2,300 debt collection complaints related to private and federal student loans during that time. Since February 2016, the Bureau took in 3,900 federal student loan servicing complaints. The report also includes an in-depth analysis of complaints for the five largest student loan servicers indicating borrowers encounter widespread problems whether they are trying to get ahead or struggling to keep up with their student debt.
The CFPB also has the Repay Student Debt tool, which helps borrowers get unbiased tips on how to navigate student loan repayment, along with other sample letters they can send to their student loan servicers. More information is at: consumerfinance.gov/students.
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.