When loan providers are assigned to each of your federal student loans, your lender—the U.S. Department of Education—expects these providers to help you manage your repayment with minimal financial disruption to your long-term financial security. This would include providing high-touch servicing and counseling regarding your repayment options. If that doesn’t sound like what you’ve experienced with your loan servicer, you aren’t alone.
In fact, a recent General Accounting Office (GAO) report found nearly 70 percent of those borrowers who default on their student loans could have qualified for an income-driven repayment plan that limits monthly loan payments to 10 percent of earnings. But, these borrowers weren’t aware of the options or made aware of them by their loan service providers when they first saw signs of trouble. The reason appears to be a misalignment of interests: Loan service providers are focused on fee generation, not counseling.
In light of this, the federal government is restructuring the contracts it signs with loan service providers to create incentives that should lead to a better alignment between your best interest and theirs.
The cost of misaligned interests.
Meanwhile, the current industry practices arising from this misalignment are under investigation by the Consumer Financial Protection Bureau (CFPB). The CFPB feels they contribute to the rising level of delinquencies, defaults and occurrences of student loan borrower distress. It is also felt that these practices are similar to those struggling homeowners experienced on their mortgages prior to and during the financial crisis. The CFPB wants to head off a new crisis.
In fact, the first enforcement action resulting from these investigations took place in July when Discover Financial Services Inc. was cited for illegal student loan servicing practices. Discover is expected to refund $16 million to borrowers and pay a $2.5 million penalty. It will also be required to improve billing, reporting and collection practices. Other firms are likely to be similarly cited since these practices are not uncommon in the industry.
Among the industry practices that concern the CFPB are the following:
- Failure to advise borrowers of options that could lessen the likelihood of default
- Improperly allocating payments to maximize late fees
- Charging late fees during the grace period after the due date
- Inconsistent information and help offered to borrowers
- Misrepresentation of minimum payments
- Providing inaccurate tax information
- Misleading consumers about bankruptcy protections
- Illegal debt collection calls
Access an advocate.
As a borrower, you don’t have to wait for the industry to implement its changes. You can access an advocate today and get the help and counseling you need.
The financial professionals at our member agencies will happily get on a call with you and your loan service provider to ensure your rights as a borrower are respected, your questions are answered, and errors in your account are corrected. They will also help ensure you have access to the best repayment plans for your financial circumstances. When you need help, get it here.