Borrowers stuck with oppressive private student loan debts continue to get little mercy from lenders, which is bad for both consumers and the financial institutions, according to a report issued Thursday by the Consumer Financial Protection Bureau.
While distressed mortgage holders have several opportunities to appeal for lower monthly payments, and federal student loan borrowers can extend the terms of the loans by 10 years or more, most private borrowers are stuck in an all-or-nothing quagmire — make the entire payment, or default.
The CFPB report criticized private student loan servicers, but did not mandate specific changes, instead issuing a series of recommendations. Reports issued last year by the CFPB, and a separate report issued in July 2013 by the FDIC and other banking regulators, made similar recommendations.
Thursday’s report, issued to fulfill an annual requirement by Congress, did highlight several examples of the problems students face, however. Such as:
- (The bank that) provided all 6 of my private loans amounting to $53,000, now tells me I owe $750 a month and that is without considering my monthly payments to federal loans. I called to ask what my options are since $750 is not a realistic monthly payment considering I am just out of college … I asked if there was a way to set up a payment plan that I could afford, as I understand these are my debts and I fully accept the responsibility to pay them completely. The representative said that the fee was set and that there was nothing he could do to alter the monthly payment.”
- I have no options left in regard to lowering my payment, forbearance, deferment or delaying my payments. I work full time as a teacher, but my student loan payment is more than a third of my income. My [specialty student loan company] just told me that there is nothing I can do but let my private loans go into default and to try to work something out with the collections agency. I have no qualms about paying a monthly fee that I can afford, but currently the money just does not exist.
Drowning in Debt
The CFPB estimates that there is $1.2 trillion in outstanding private and federal student loan debt, with more than 7 million Americans in default.
CFPB student loan ombudsman Rohit Chopra said that the most risky lending practices from the last decade had largely disappeared, as they have in the mortgage market, but consumers who attended school during that time were still suffering from the consequences, and getting little help.
“The response by the private student loan industry to distressed borrowers is failing to help them avoid default,” said Chopra. “Too many borrowers are barely treading water, losing hope that these companies will throw them a lifeline.”
The report is based on 5,300 complaints filed with the CFPB during the past 12 months, which the agency says is a 38% increase from the previous 12-month period.
Complaints run the gamut — even borrowers who tried to pay more than their required monthly payments ran into conflicts with servicers.
“Many consumers who wished to pay down their loans more quickly found that student loan servicers allocated payments in ways that might maximize the amount of total interest the borrower would pay, slowing him or her down on the path to being debt-free,” the report said.
But by far, the most complaints concerned consumers looking for alternatives to oppressive monthly loan payments.
According to the CFPB, the top complaints included:
- Little information on ways to avoid default: Many borrowers said they were unaware of what loan modifications were available and what the criteria for qualifying were. The information was not readily available on these lenders’ or servicers’ websites. Many struggling borrowers also reported receiving conflicting or inaccurate information as they were bounced between multiple customer service representatives.
- No affordable loan modifications available: Federal student loan borrowers are entitled, by law, to a range of affordable loan modification options, including income-based repayment, extended loan terms, and plans that start with a small payment and increase over time. These same options are not available for private student loan borrowers. Instead, consumers complained that private student lenders and servicers tell them that they are not eligible for any affordable repayment plan that would allow them to avoid default.
- Temporary fixes that only delay default: Borrowers reported that while many private student lenders and servicers do not offer affordable repayment plans, some may offer temporary forbearance. This short-term fix may delay default by giving borrowers a brief period where no payment is due, often just a few months. Even for these temporary forbearance options, though, borrowers complain of burdensome enrollment fees and processing delays, sometimes leading to surprise defaults.
Chopra stressed that both servicers and borrowers would be better off if former students were allowed to lower their payments by extending the terms of their loan, lower their interest rates or receive principal relief. So far, financial institutions have been slow to adopt that stance, however. Meanwhile, defaulting on student loans can do considerable damage to a borrower’s credit, which can make it difficult to qualify for other loans or credit down the road. (You can use free tools on Credit.com to see how your loans and payment history are affecting your credit score.)
“Regulators and policymakers have encouraged lenders to constructively engage with borrowers to find workout solutions,” the report said. “Despite commitments by a number of major market participants to expand alternative repayment options, consumers continue to encounter limited or no flexibility when seeking help from their lender or servicer.”
More on Student Loans:
- A Credit Guide for College Graduates
- How to Pay for College Without Building a Mountain of Debt
- Strategies for Paying Off Student Loan Debt