WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman released a report finding consumers complain of servicing problems that make it difficult to get lower student loan payments tied to their income. Student loan borrowers seeking to take advantage of income-driven repayment plans with their federal student loans complain to the CFPB about prolonged processing delays and wrongful rejections by their student loan servicers. These delays and rejections can result in increased interest charges and lost eligibility for certain federal benefits and protections. To help borrowers overcome these obstacles, today the CFPB is publishing a prototype “Fix It Form” that servicers can use to improve the level of service they provide.
“Student loan servicers continue to fall short when it comes to helping borrowers address $1.3 trillion in student debt,” said CFPB Director Richard Cordray. “It’s time servicers focus more effectively on processing applications for income-driven repayment plans properly.”
"Student loan servicing breakdowns can stack thousands of dollars of hidden costs on the backs of borrowers who can least afford them,” said CFPB Student Loan Ombudsman Seth Frotman. “Too many student loan borrowers are struggling to take advantage of their right to pay based on how much money they make. Servicers who want to better serve their customers can take the immediate steps recommended in this report to clean up this broken process.”
Student loans make up the nation’s second largest consumer debt market. The market has grown rapidly in the last decade with about 43 million Americans now owing money. The CFPB has estimated that the combined total for outstanding federal and private student loan debt has reached nearly $1.3 trillion. The majority of this debt is from federal loans. Third-party private servicers typically manage the repayment of federal student loans, and borrowers depend on them to facilitate successful repayment.
Since 2009, the vast majority of borrowers with federal student loans have had a right under federal law to set their monthly student loan payments based on their income and family size. For borrowers who experience financial hardship, these income-driven repayment plans can make a real difference. For borrowers who are unemployed or earn low wages, payments under these plans can be as low as zero dollars per month. In addition, the federal government forgives the remaining balance on loans after the borrowers have made timely payments for 25 years, or in some cases 20 or even just 10 years. Another benefit for consumers with subsidized loans is that, if their monthly income-based repayment is less than the interest that accrues, the government will pay the difference for the first three years, which means the consumer’s overall balance won’t increase.
As of the first quarter of 2016, about 5 million student loan borrowers were enrolled in an income-driven repayment plan. However, a recent government report noted that many eligible consumers with federal student loans are not taking advantage of the program, with many being driven needlessly to default on their loans. The Bureau estimates that one out of four borrowers is currently in default or scrambling to stay current on their student loans.
Today’s report analyzes complaints submitted to the CFPB between Oct. 1, 2015 and May 31, 2016. The Bureau handled approximately 3,500 private student loan complaints, and 1,500 debt collection complaints related to private and federal student loans during that time. For the last three months of this period, the Bureau took in 2,400 federal student loan servicing complaints. A top complaint had to do with income-driven repayment plans, with borrowers saying they encounter delays and breakdowns after they send in an application. Among the issues that consumers report facing:
- Application abyss: Generally, the income-driven repayment application process should take no more than two weeks. However, borrowers report that their applications sit under review for weeks or months at a time, leaving them to linger in an application abyss. These delays can cause borrowers to lose out on protections that can lower their monthly payment, save them money on interest charges, and start them on the path to loan forgiveness.
- Repayment rejection: Borrowers report being rejected because their application had missing information or because their servicer lost paperwork, without ever being notified by their servicer or being given a chance to fix the problem. Other borrowers report being rejected simply for checking the wrong box, without being given the opportunity to submit a corrected form. These errors discourage borrowers from restarting the application process, and some borrowers may choose to walk away from their loan, instead of remaining on the road to repayment.
- Recertification replay: For borrowers who successfully enroll in an income-based repayment plan, they may re-encounter the same obstacles each year since they need to certify their income and family size annually in order to keep an income-driven payment. Servicing practices related to recertification, particularly processing delays and wrongful rejections, can drive substantial and unnecessary increased costs for borrowers.
- Costs of thousands of dollars over the life of the loan: Today’s report estimates that, for the most financially vulnerable borrowers, processing delays may cost more than $2 per day and can last weeks or months. For borrowers with high loan balances or higher interest rates, the Bureau estimates these costs to be substantially greater. This can cost consumers thousands of dollars over the life of the loan.
Fix It Form
Today’s report recommends that servicers improve the level of service they provide to student loan borrowers applying for income-driven repayment plans. Last month, the Department of Education called for servicers to set better standards for handling income-driven repayment applications. The Department of Education issued guidance saying servicers must be more actively engaged with borrowers who do not have complete applications. The CFPB’s Fix It Form complements this work and can be used by servicers to help them address application problems. Servicers can use this Fix It Form to help borrowers understand whether their income-driven repayment application has been approved, denied, or needs to be corrected. When a borrower needs to make a correction or provide more information, servicers can use the Fix It Form to help consumers understand how to "fix it" and stay on track. Specifically, the form would:
- Create more responsive, consistent servicing: Borrowers would benefit from a consistent, industry-wide set of practices to process and evaluate income-driven repayment applications, modeled on the Department of Education’s policy guidance. The Fix It Form would ensure that all borrowers receive high-quality, timely service and are evaluated based on the same criteria, regardless of the identity of their student loan servicer.
- Improve transparency around criteria: The Fix It Form documents problems with an application and communicates with borrowers about how to address what’s missing and get their application back on track. Servicers would tell borrowers, for example, if they are missing key information like signatures or if their income documentation is out of date.
- Improve access: Making the process easier for consumers will bolster applications and increase the number of borrowers who are able to invoke their right to a federal income-driven repayment plan. An easier process could save borrowers from forbearance and default. The Fix It Form would also be available to any consumer who wants to download it and use it to navigate the process.
With today’s report, the Bureau has now identified consumer complaints about problematic servicing practices at every stage of the servicing lifecycle of an income-driven repayment plan. A CFPB report last year identified problems with how student loan servicers communicate with their customers on the availability of repayment options. The report highlighted concerns raised by consumers that servicing personnel drove borrowers into forbearance and other short-term options rather than emphasizing the benefits of and facilitating enrollment in an income-driven repayment plan. The Bureau’s Student Loan Ombudsman also reported on problems related to communication and processing breakdowns for borrowers seeking to recertify their income and family size in order to maintain affordable payments under an income-driven repayment plan.
The Dodd-Frank Wall Street Reform and Consumer Protection Act established an ombudsman for private student loans within the CFPB to assist borrowers with private student loan complaints.
The CFPB began accepting consumer complaints about private student loans in March 2012 and began accepting complaints about the servicing of federal student loans in February 2016. 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.