Consumer Financial Protection Bureau Director Richard Cordray says the federal student loan rehabilitation program has serious flaws. (Win McNamee/Getty Images)

If the government fails to fix breakdowns in a federal program to lift student loan borrowers out of default, one in three of those people could be driven back into default over the next two years and pay more than $125 million in unnecessary interest charges, the Consumer Financial Protection Bureau said Monday.

The dire prediction stems from problems the consumer watchdog identified in the federal student loan rehabilitation program, which erases a default from a person’s credit report after nine consecutive payments over a 10-month period to a debt collector. Participants in the program have complained to the bureau of collection agencies setting incorrect monthly payment amounts, having trouble verifying their income and not applying payments toward the rehabilitation process.

Even when people successfully complete the program, they are running into problems enrolling in an affordable repayment program, according to the CFPB, which based its findings on complaints collected between Oct. 1, 2015, and May 31, 2016. Most qualify for federal income-driven repayment plans that cap monthly payments to a percentage of their earnings, but the bureau is receiving complaints that student loan servicers, the middlemen that collect payments, are dragging their feet in getting borrowers enrolled. Some people complain of being hit with high monthly bills despite negotiating lower payments or receiving conflicting information about where to send payments and how those payments will be applied.

“The consumer protections promised under federal law should make it nearly impossible for the most vulnerable consumers to be trapped in default,” CFPB Director Richard Cordray said in a statement. “Far too many of these borrowers continue to fall through the cracks of a flawed student loan system.”

About 8.1 million people had not made a payment on $128 billion in student loans for at least nine months as of June, an 8 percent increase over the same period a year earlier, according to the Education Department. The share of people defaulting for the first time has declined as a percentage of borrowers in repayment, which is the total universe of people repaying their loans. But the number of borrowers with newer loans who were falling behind on payments is high, and tens of thousands of people are defaulting for at least the second time.

The CFPB says misaligned debt-collection incentives are part of the problem. The Education Department pays debt collectors as much as $40 for every dollar collected from struggling borrowers, even if borrowers end up back in default. Based on consumer complaints, the CFPB says collection agencies may be focusing on quickly completing the nine-month rehabilitation process, rather than providing people the necessary information to stay current on their loans over the long term.

“This matches what I have been seeing on the ground,” Adam Minsky, a lawyer specializing in student debt, said of the CFPB’s findings. “During rehabilitation, I see an array of issues and problems that could derail borrowers — irregularities in calculating a borrower’s monthly payment, failure to deduct payments properly . . . failures to lift wage garnishment orders.”

Minsky said servicers are equally as culpable as debt collectors in letting people fall through the cracks. He said he has had to track down where the loans went after rehabilitation because his client never received any notice. There is also inconsistency between servicing companies, even though all work on behalf of the federal government, as some companies are more flexible than others in giving borrowers time to find the best repayment plan, Minsky said.

Education officials can shore up efforts to keep borrowers from falling back into defaults by streamlining and simplifying the rehabilitation process, which has not undergone any significant changes in more than two decades. Loan servicers say they often have trouble getting complete records of borrowers transitioning out of the collection system, which can result in delays and errors.

Patricia Christel, a spokeswoman for student loan servicer Navient, said the company has “recommended streamlining the income-driven enrollment process as well as a unified rehabilitation and income-driven repayment application to make the process easier for these at-risk borrowers.”

Education Department spokeswoman Kelly Leon said the agency is working overhaul the payment system to help people avoid default. President Obama tasked the agency with simplifying the way it collects loan payments in his Student Aid Bill of Rights. Leon said the department plans to award the contract to build the new platform by the end of this year.

“We envision a single-platform loan servicing system that will create incentives and guidelines that support a high-quality, one-on-one customer service experience and provides helpful guidance to borrowers,” she said. “And when servicers don’t meet those standards, they will face consequences.”

For its part, the CFPB on Monday sent loan servicers a request for information on how previously defaulted borrowers perform over time. The bureau says the information will help assess how current practices intended to help at-risk borrowers may differ among companies.

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