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The crushing weight of student loan debt hurts us all

Charlene Crowell | 10/28/2015, 9:36 p.m.
As the cost of higher education has risen, students and their families have increasingly turned to student loans to cover ...

As the cost of higher education has risen, students and their families have increasingly turned to student loans to cover costs. Today, according to the Consumer Financial Protection Bureau (CFPB), 41 million consumers collectively owe more than $1.2 trillion in debt.

What is less commonly known, however, is that millions of student loan borrowers are delinquent or in default on $175 billion in student loan balances. To frame it another way: more than one in four student-loan borrowers are either delinquent or in default.

With that kind of red ink, the CFPB began a public inquiry that has now led to over 30,000 comments sharing the difficult struggles of student loan repayments, as well as remedies to cure this growing trend. Many of these struggles can be traced back to student loan servicers – the companies hired by the Department of Education to collect loan payments and, in theory, assist borrowers if they get into trouble.

Consumers reported a litany of servicing woes to the CFPB, reminiscent of those that affected mortgages and foreclosures just a few years ago. Lost paperwork, misapplied payments and difficulty correcting errors are just a few of the unfortunate circumstances student borrowers and co-signers face.

But one of the biggest problems facing student loan borrowers is servicers’ failure to help them avoid default and distress by enrolling into any of several repayment plans that might help them out of a financial pinch.

Federal loans offer options to alter loan repayments. Deferring payments due to unemployment or income-based repayments that adjust to each borrower’s capacity to repay have helped many borrowers to financially cope. Depending upon the type of federal loan and employment secured, some loans may be forgiven after years of prompt payment and public service.

Even with these options, 70 percent of federal direct loan borrowers in default actually met income requirements for lower monthly payments attached to income-driven repayment plans, according to a report released by the General Accounting Office earlier this year. Additional evidence suggests that borrowers enrolled in income-driven repayment plans can avoid default more easily compared to borrowers who do not enroll.

For CFPB, this disturbing data point prompts questions as to how well or even if borrowers knew all their available options. Comments filed with CFPB suggest that some servicers provided either conflicting or inaccurate information that denied the best loan remedy. In some cases, the remedy offered increased loan costs. In other instances, late payment processing often created higher interest charges and late fees.

“There are no consistent, market-wide federal standards for student loan servicing and servicers generally have discretion to determine policies related to many aspects of servicing operations,” states CFPB’s report.

“A growing body of evidence suggests that rising levels of student loan indebtedness may also have had spillover effects on other segments of the economy—potentially limiting borrowers’ access to credit, diminishing savings, reducing homeownership, threatening retirement security, and inhibiting borrowers from pursuing careers as healthcare providers and educators in underserved communities, or as entrepreneurs,” the report continued.

To effectively alleviate student debt burdens, the CFPB along with the U.S. Treasury and Department of Education have together endorsed a set of principles to guide student loan servicing reforms. These principles would apply to both private and federal loans. In part these principles call for:
• Publishing information about the practices of lenders and servicers, along with information on the performance of private and federal student loans;
• Holding loan servicers accountable for violations of contractual agreements, federal regulations and consumer laws at both the state and federal levels; and

• Directing servicers to provide accurate information to borrowers and provide effective student loan servicing.

“Good student loan servicing is the key to successful loan repayment,” said Leslie Parrish, Deputy Director of Research at the Center for Responsible Lending. “No borrower should default because the servicer failed to give them the attention they deserved. The CFPB and Department of Education must work together to comprehensively reform student loan servicing.”

Charlene Crowell is a communications manager with the Center for Responsible Lending.