I’ve always liked the idea of an ombudsman, a person who can look at a situation and praise or criticize it, but most important, bring attention to a problem.
That’s what Rohit Chopra, ombudsman for the Consumer Financial Protection Bureau, has done. Chopra said that on the basis of the complaints the CFPB has received, he is concerned that we face a student-loan-servicing sequel that will rival the home-mortgage crisis that helped lead to the financial collapse of 2008.
The Dodd-Frank Wall Street reform legislation established an ombudsman’s position at the CFPB with the specific charge to look at student loans, including private ones. Unlike the federal versions, private education loans generally have higher and variable interest rates.
In March, the CFPB began accepting student loan complaints at www.consumerfinance.gov and toll-free at 1-855-411-2372. The agency has received about 2,900 complaints, with the majority related to loan servicing and loan modification issues, Chopra said in his report issued this month.
Chopra says many borrowers complain that they have difficulty contacting their servicer. Private student loans are made by banks and credit unions, state-affiliated and nonprofit agencies, schools and other financial companies, he notes. And, similar to the mortgage market, lenders can hire third-party companies to collect payments.
Borrowers reported problems trying to take advantage of repayment incentives promised to them before they signed up for a loan. The CFPB heard from one borrower who had signed up for automatic payments. She had 36 consecutive monthly payments debited from her checking account. After her 36th payment, she applied to have her co-signer released from the loan, which was a benefit that was advertised at the time she took out the loan. The lender rejected her application, arguing that some of her payments were late. Here’s the kicker: The borrower told the CFPB that her lender said “it could take up to three days for the payments to post and some of them posted late.”
The experiences of student loan recipients are very similar to the practices criticized in the mortgage servicing business, Chopra said. Complaints included not applying people’s payments properly, not responding to errors quickly enough and borrowers’ inability to get in touch with the right person in times of hardship.
“Borrowers had a lot of detours and dead ends,” he said.
By far the most common concern communicated by borrowers was difficulty negotiating a repayment plan with their servicer during periods of unemployment, underemployment or financial hardship, Chopra wrote. “Many borrowers report frustration that they are unable to identify appropriate personnel that can make a determination about their repayment options.”
Sallie Mae, the nation’s largest private student lender, received the bulk of private student loan complaints — 46 percent — although Chopra said that this could be because the company is such a big player in the industry.
In a statement, Sallie Mae responded: “When customers facing financial difficulty have exhausted traditional repayment options, we may offer a variety of tools that help amortize the loan including reduced monthly payments, interest-only payments, extended repayment schedules and temporary interest rate reductions all scaled to a customer’s individual circumstances and ability to make manageable payments. In fact, we have modified $1.1 billion in private education loans with interest rate reductions or extended repayment since 2009.”
This is what we know about student loans: At more than $1 trillion, they have surpassed credit cards as the largest source of outstanding consumer debt other than home mortgages. Private student loans account for more than $150 billion of the outstanding debt, and more than 850,000 of these loans are in default, with even more in delinquency, Chopra reported.
Although the report relies on borrowers’ testimonies, the roadblocks that borrowers face must be understood and addressed, Chopra said.
So what are the takeaways from this report?
First, contact the CFPB if you have a complaint about your student loan lender. Go to www.
consumerfinance.gov/students. Calls to the bureau are answered weekdays from 8 a.m. to 8 p.m. Or you can sent your complaint by mail to P.O. Box 4503, Iowa City, Iowa 52244. You can also send a toll-free fax to 1-855-237-2392.
If you are going to miss a payment or not make a full payment, contact your servicer or check the CFPB’s Web site to investigate your options, Chopra said.
“When faced with customer service frustrations, we tell people to be persistent and try to stay current so you don’t rack up fees or get a black mark on your credit report,” he said.
I would like to see the ombudsman’s report lead to a comprehensive look at both federal and private student loans. Students and parents need unbiased counseling before taking out loans so that they fully understand the magnitude of the debt they might be taking on.
Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071, or singletarym@washpost.
com. Personal responses may not be possible, and comments or questions may be used in a future column, with the writer’s name, unless otherwise requested. To read previous Color of Money columns, go to postbusiness.com.