The start of a new college year is here, but a report on private student loans from the Consumer Financial Protection Bureau that highlights disturbing news about the problems students are having with lenders and loan servicers puts a damper on this exciting time for students nationwide.
When students try to get basic information about their private loan accounts, they often get the runaround: Payments may be credited late or unevenly, record keeping is poor, and customer service is lousy. The most frequent complaint from students is that they are given few options to refinance or modify repayment for a better deal. Those findings (PDF) by the CFPB, unfortunately, are similar to those in a fall 2012 report.
Students’ frustrations with their loan servicers sound all too much like the problems we’ve seen in the mortgage servicing business, where borrowers often can’t get the straight answers and critical information they deserve.
Outstanding student debt in the U.S. is approaching $1.2 trillion, according to the CFPB. The total includes about $165 billion in outstanding private student loan debt.
That may seem like a small piece of the pie, but private student loans stand out because they can come with variable rates that may be significantly higher than federal loans.
Plus, federal student loan borrowers who are struggling with low wages and other setbacks can seek deferrals and flexible repayment programs, while the private loan borrower doesn’t have the legal right to such choices.
'Graduates don’t have a fair chance to pay back their debts if they are faced with surprises, runarounds, and dead-ends.'—Director Richard Cordray, CFPB
To help struggling private student loan borrowers, Consumers Union, the policy and advocacy arm of Consumer Reports, is asking policymakers and regulators to put two key reforms in place:
Flexible repayment. Private lenders should offer income-based repayment plans to borrowers. Borrowers who demonstrate financial hardship, due to high debt balances and modest wages, should be allowed to repay a reasonable percentage of their income in order to stay current.
Refinancing options. Lenders should develop refinancing options for private student loan borrowers. When borrowers demonstrate a pattern of responsible behavior, they should have the opportunity to shop around for lower interest rates as they become available.
The proposals are part of the seven basic principles for fair student lending from Consumers Union.
Last year, Richard Cordray, director of the CFPB, said: “Graduates don’t have a fair chance to pay back their debts if they are faced with surprises, runarounds, and dead-ends by student loan servicers. These young consumers are facing serious challenges in dealing with their debt, which can hold them back from getting ahead in life.”
We agree. If you’re having problems with a student loan, private or federal, we want to hear from you. Sharing your story will help us bring some fairness and clarity to the confusion of student loans. Tell us your story.
This feature is part of a regular series by Consumers Union, the public-policy and advocacy division of Consumer Reports. The nonprofit organization advocates for product safety, financial reform, safer food, health reform, and other consumer issues in Washington, D.C., the states, and in the marketplace.