Thank you all for joining us today in Milwaukee. Plato once said, “The direction in which education starts a man will determine his future life.” More Americans are heeding that advice and going to college at record rates – including both women and men, I might add, unlike in Plato’s day. At the same time, the high price of college has created pressure and anxiety for students and families across the country.
Today the Consumer Financial Protection Bureau is here in Wisconsin to focus on how tens of millions of Americans are affected by their student debt load, which in the aggregate now tops $1.2 trillion. Wisconsin alone has about 812,000 federal student loan borrowers who owe $18.2 billion. This does not even include the expensive private student loans that many Wisconsin students most likely took out to get through school. This is a significant burden now being carried by many of our best and brightest.
Student loans are now the largest source of consumer debt outside of mortgages. Two-thirds of graduates are finishing their bachelor’s degrees with debt that averages nearly $30,000. Among the most careful observers of economic data, there is a growing consensus that a strain of this magnitude can have repercussions that threaten the economic security of young Americans and economic growth for all Americans. Significant debt can have a domino effect on the major choices people make in their lives: whether to take a particular job, whether to move, whether to buy a home, even whether to get married.
Two years ago, we issued a public notice and held a hearing to gather input on the student debt domino effect. We received more than 28,000 responses. The responses identified areas of concern, including an overwhelming feeling by many borrowers that the process of paying back their loans creates harms of its own and should be improved. They said the frustrations and difficulties of understanding when, where, and how to pay back student debt are stressful and counter-productive. Today we are going to be focusing on these issues.
Borrowers who finance a home, a car, or an education often find that a company they never heard of acts as their loan servicer, with the responsibility to collect and allocate the loan payments. For young people finishing college, student loan servicers will be their primary point of contact on their outstanding loans. These companies are responsible for collecting payments and sending the payments to the loan holders. Borrowers rely on them to process payments accurately, to provide billing information, and to answer questions about their accounts, including ways to help prevent default. The servicer is often different from the lender. This means consumers often have no control or choice over the company they are dealing with to manage their loans.
As a growing share of student loan borrowers reach out to their servicers for help, the problems they encounter bear an uncanny resemblance to the situation where struggling homeowners reached out to their mortgage servicers before, during, and after the financial crisis. Having seen the improper and unnecessary foreclosures experienced by many homeowners, the Consumer Bureau is concerned that inadequate servicing is also contributing to America’s growing student loan default problem. At this point, about 8 million Americans are in default on more than $100 billion in outstanding student loan balances.
Today we are launching a public inquiry into student loan servicing practices. The inquiry seeks information on the hurdles that make repayment a stressful process and even at times a harmful one. For many young people, repaying a student loan is one of their first experiences in the financial marketplace. Starting off their financial lives with such a big debt load can feel overwhelming, and it can become all the more stressful when things do not go right. Defaulting on a student loan can be devastating, making it harder for a young person to gain a firm financial footing. The resulting pressures can make student loan borrowers feel like they are walking a tightrope where any false move can cause them to fall.
The Request for Information that the Consumer Bureau is issuing today is meant to find ways to put the “service” back into the student loan servicing market and help people avoid unnecessary defaults. We are encouraging student borrowers to share their experiences by visiting ConsumerFinance.gov. To spread word of this initiative online, use the hashtag #StudentDebtStress.
At every stage of the process of paying back their student loans, borrowers have told us they are wrapped in mounds of red tape, particularly for private student loans. From the beginning, when they first graduate and start making their initial payments, consumers can experience problems with payment posting, problems with attempted prepayments, and problems with partial rather than full payments. For example, some former students have told us they find it takes a few days for servicers to process their payments, which can cause them to have to pay additional interest. We have also heard from borrowers who complain about inconsistency, noting that they often get widely different information, protections, and rights depending on what type of loan they have.
When borrowers do seek any sort of help, the range and severity of their problems can quickly snowball. They have told us about lost paperwork, unanswered inquiries, and no clear path to get answers. They also find that when errors are made, they may not be fixed very quickly. They may encounter limited access to basic account information, including their payment history over the years. One borrower told us, for example, that she made her payment on-time and in-full each month through an automatic payment system established by the lender but still faced problems with unexpected fees. Once again, these kinds of problems are not new to loan servicing in general, and in particular they have happened repeatedly in the mortgage servicing market over the past decade.
The stress can get even worse when loans change hands from one servicer to another. Transfers are very common in this market, and the consumer has no control over it. Between 2010 and 2013, more than 10 million student loan borrowers had their loans move from one servicer to another for various reasons other than consumer preference. One person told us that after seven years her account was switched to another company. Suddenly, she stopped receiving paper statements and since then has had to call the new servicer each month to confirm her payment amount.
These loan transfers can produce real headaches and confusion for consumers. Some borrowers have complained that they are charged late fees because they mailed their payments to their old servicers without being aware that this was now an error. Other types of problems can arise as well. We heard from one person who said he made full payments each month for six years. But when he informed the new company handling his loan that he wished to enroll in an alternative payment plan that had been available from his original servicer, he was told that was no longer an option.
In today’s Request for Information, we are seeking greater understanding of industry practices and the underlying market forces that are causing various pain points for borrowers.
The inquiry seeks to determine if the student loan servicing industry is doing things that make repayment more complicated and more costly for consumers. We are interested to know whether payments are applied in ways that maximize fees or lengthen the amount of time for repayment. And we also want to know whether servicers are forwarding enough information to the new company when the rights to a loan are sold.
We also intend to get a deeper understanding of whether there are in fact, as some would claim, economic incentives for inadequate service. Because student loan borrowers generally do not get to choose the company that handles their loans, ordinary market forces will not guarantee reasonable customer care. The model used in most third-party student loan servicing contracts provides companies with a flat monthly fee for each account. This fee is generally fixed and does not rise or fall depending on the level of attention that a particular borrower requires in a given month. This means that student loan servicers often make more money when they spend as little time as possible on each account, and they typically get paid more when a borrower is in repayment longer. So we are evaluating whether the typical methods of servicer compensation can jeopardize the interests of borrowers. We especially want to know if there are adequate economic incentives to take the time to enroll people in flexible repayment options or to help them avoid default.
We also are interested in seeing what we can learn from protections offered in other consumer credit markets. Protections offered to consumers with credit cards and mortgages might help improve the quality of student loan servicing as well. In recent years, policymakers have adopted broad-based changes to strengthen federal consumer financial laws so that they better protect consumers with mortgages and credit cards. But there is currently no comprehensive statutory or regulatory framework that provides uniform standards for the servicing of all student loans.
This means servicers in other markets are subject to more precise rules that include customer service standards, limits on certain fees, written acknowledgement of disputes, and protections when loans are sold. In some cases, servicers are required to explain the options that are available to distressed borrowers. For example, a mortgage servicer must consider all foreclosure alternatives available and cannot steer homeowners to those options that are most financially favorable to the servicer.
And so we are deeply interested to learn more about whether recent reforms in the credit card and mortgage servicing markets might help improve performance in the student loan servicing market. After all, loan servicing generally includes many common functions, irrespective of the underlying consumer financial product, such as account maintenance, billing and payment processing, customer service, and managing accounts for customers experiencing financial distress.
Some of these comparisons may be quite specific. For example, credit card users have had certain protections under the CARD Act since 2009. Consumers get timely posting of their payments and periodic billing statements at least 21 days before payment is due. If a consumer has multiple balances at multiple interest rates, any extra payments generally must be allocated to balances with the highest interest rate, so borrowers can get out of debt as quickly as possible. We are seeking information on whether applying these same approaches might benefit student loan borrowers as well.
In the same vein, the Bureau is seeking information on whether the reforms we recently made to the mortgage servicing market might also benefit student loan borrowers. Reforms related to payment handling, loan transfers, error resolution, interest rate adjustment notifications, loan counseling, and treatment of distressed borrowers are all now in place to improve the functioning of the mortgage servicing market. We are analyzing whether these protections should inform policymakers and market participants when considering improvements in student loan servicing.
Furthermore, the lack of transparency of the student loan market remains deeply problematic. Both the financial regulators and the public lack access to basic, fundamental data on student loan origination and performance. Without this information, we will be challenged to understand the complete set of risks posed by student debt burdens. Today’s Request for Information asks whether more can be done on this issue and what, in fact, should be done.
At the Consumer Bureau, our mission is to provide evenhanded oversight of industry while promoting fair and transparent markets. For this reason, we finalized a rule that will allow us to supervise larger nonbank student loan servicers, thereby closing a significant gap in oversight for compliance with federal consumer financial laws. So the landscape is already changing.
We are also grateful to our partners at the Departments of Education and Treasury and among the state attorneys general for their work to protect student loan borrowers. As our country pursues a vigorous debate about higher education policy, it is imperative that we keep in mind the very real challenges of those who have already accrued substantial student loan debt. We must do more on their behalf. Student loans play a pivotal role in young people’s lives as they seek to establish their creditworthiness and eventually finance their first major purchases. And with more than 40 million Americans now carrying substantial student debt loads, it is simply unacceptable to leave them without robust consumer protections and a well-functioning servicer market.
Abigail Adams once said, “Learning is not attained by chance, it must be sought for with ardor and diligence.” In today’s world, her statement applies not only to how we should seek to educate ourselves, but also to how we should seek to provide financing that makes educational opportunity possible. The rights of consumers to be treated fairly and according to the law must likewise be pursued with ardor and diligence. Thank you.
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.