College students who took out private student loans before the recession hit are telling the government they’re getting a runaround from lenders as they struggle to pay them back.
In a report to be released Tuesday, the federal Consumer Financial Protection Bureau found that student borrowers, like homeowners with troubled mortgages, are upset about how hard it can be to get help with their payment problems, and how long it can take for lenders to fix their own errors.
“Student loan borrower stories of detours and dead ends with their servicers bear an uncanny resemblance to problematic practices uncovered in the mortgage servicing business,” said Rohit Chopra, the bureau’s ombudsman for student loans.
His report was based on nearly 2,900 complaints to his office since March, when it set up a website – ConsumerFinance.gov – to inquire about problems that borrowers were having with the private student loan market.
The consumer protection agency, newly established under a Wall Street regulation law, worked with the Department of Education on the project.
The federal government took over the student loan business under President Barack Obama. The administration said that the move saved billions of dollars in middle-man costs. Unlike federal student loans, private loans don’t have a system of income-based repayment.
Currently, the outstanding student loan debt stands at more than $1 trillion. Private loans account for more than $150 billion of that total, the report said. About $8 billion of those loans are in default.
Chopra said the report was not an attempt to measure how common the problems were, but as “an early warning” of further concerns that could surface in the future.
Sallie Mae, a major private student lender, said in a statement that it helps customers who run into financial trouble.
“We have modified $1.1 billion in private education loans with interest rate reductions or extended repayment since 2009,” the company said.
Many of the borrowers who complained took out the loans before the economy tanked in 2008, and then graduated at a time when jobs have been hard to find, according to the report. They said that they can’t take advantage of lower interest rates or modify their repayment plans when they don’t earn enough money to make large monthly payments.
Many of the complainants had obtained loans to attend for-profit colleges and said that school representatives had assured them they’d find jobs and be able to pay the loans back. But that didn’t happen.
Others said that they were caught by surprise with unexpected fees and often have been unable to reach a loan official to help them reschedule payments to avoid default.
Chopra said that borrowers also complained about how their payments were handled. He said some with more than one loan reported that extra payments that they meant to apply to high interest rate loans were mistakenly applied to a loan with a lower rate instead.
The report suggested that lenders implement “creative efforts” to help borrowers restructure their debt when necessary. Modifying such loans would not only help borrowers, but could lead to higher overall collections for lenders, it said. Congress should look into ways to make it easier to get the loans modified, the agency said.