COLUMBUS – A federal consumer watchdog is putting companies that service student loans on notice today: Unclear, inconsistent and unfair treatment is hurting borrowers and driving up defaults, and the agency intends to set standards and enforce them.
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The Consumer Financial Protection Bureau, which regulates all student-loan programs, issued a report detailing the problems it found after putting out a call in May for public feedback about student-loan servicers. The effort was coordinated with the U.S. Treasury Department and Department of Education.
More than 30,000 comments later, the Bureau has concluded that a lack of industry-wide standards allows student-loan servicers to set their own policies, many of which mistreat borrowers in a variety of ways:
Borrowers having trouble paying off their loans are steered to alternative plans that suit the servicer rather than help the borrower most. For example, some who could make income-based payments are encouraged to seek forbearance, which causes them to pay more over time.
Errors such as misapplied payments or failure to notify borrowers of a change in servicer can cause borrowers to fall behind in their loans even when they are making regular payments. Uncorrected errors are especially damaging to borrowers whose credit already is threatened by financial difficulty.
Student-loan servicers aren’t required to report data on such measures as loan performance, student outcomes and demographics. The report says such data could help policymakers set better rules and prevent defaults.
Student loans make up the nation’s second-largest consumer debt market, after mortgages. More than 40 million people hold federal and private student loans totaling more than $1.2 trillion. One in four student loan borrowers is in default or struggling to stay current.