Federal Oversight on Student Loan Servicer Management Shows a Bumpy Transition for Student Loan Borrowers

By Hugh T. Ferguson, NASFAA Senior Staff Reporter

A pair of announcements from federal agencies overseeing the transition of student loan borrowers returning to repayment indicate that during the transition period a number of servicers have contributed to a challenging landscape for borrowers attempting to meet their payment obligations.

The first action came from the Department of Education (ED) on Friday when it announced it would be withholding payments to three student loan servicers due to their failure to meet contractual obligations by sending timely billing statements to a combined 758,000 student loan borrowers during the first month of repayment.

ED said it will withhold $2 million, $161,000, and $13,000 respectively from Aidvantage, EdFinancial, and Nelnet, which the department said all failed to meet their obligations. The totals are based upon the number of borrowers impacted.

In order to address these errors, ED directed each servicer to place impacted borrowers into administrative forbearance, where they will remain until the issue is resolved. While loans are in forbearance, ED said that borrowers will not be required to make payments, and their accrued interest will be adjusted to zero. Further, any month a borrower is in forbearance due to this issue will count toward Public Service Loan Forgiveness (PSLF) and income-driven repayment (IDR) plans.

“As millions of Americans return to repayment, the Department of Education will continue to engage in aggressive oversight of student loan servicers and put the interests of borrowers first,” Education Secretary Miguel Cardona said in a statement. “When unacceptable errors are uncovered, servicers should expect to be held accountable and borrowers should count on this administration to hold them harmless.”

Back in October, ED announced that it was withholding $7.2 million from MOHELA over issues with billing statements to 2.5 million borrowers.

Also on Friday, the Consumer Financial Protection Bureau (CFPB) published a spotlight issue paper highlighting its oversight of student loan servicing practices and issues it had identified related to the resumption of repayment, such as long wait times and abandoned calls, delays in processing IDR plan applications, and issues with billing statements.

CFPB identified these issues by using consumer complaints, along with its supervisory authority to examine loan servicer conduct and performance.

In the report, the bureau claimed long servicer wait times and abandoned calls forced many borrowers to give up without receiving any assistance. According to CFPB, average wait times rose from 12 minutes in August 2023 to 60 minutes in October 2023, with call abandonment rates jumping from 10% to nearly 30% during the same period.

CFPB also recorded instances of significant delays in servicers processing IDR plan applications, with some servicers taking “five times longer than others to process applications.” Servicers reported that between August and October of 2023 that there were 1.25 million pending IDR plan applications and that more than 450,000 of those applications were pending for more than 30 days with no resolution.

The final issue tied into a similar trend that ED found concerning billing statements. CFPB’s paper found that servicers provided “premature due dates before the end of the payment pause, inflating monthly payment amounts due to the servicer using outdated poverty guidelines, or using the incorrect income when calculating a borrower’s new income-driven repayment plan payment.”

“The report shows that there is significant variation between servicers in their ability to manage these demands. During the payment pause, many servicers made a business decision to cut costs and significantly curtail their capacity,” CFPB Director Rohit Chopra said in a statement. “However, loan servicers must adhere to existing law. In certain cases, the CFPB has notified servicers that they may be in violation of federal consumer financial protection law.”

While the transition to student loan repayments continues, ED also highlighted a recent letter it sent to credit reporting agencies and credit scoring companies in an effort to prevent any issues during the transition from impacting a borrower's credit. The letter reminds those organizations that a borrower's current payment behavior is “not necessarily indicative of an inability or unwillingness to make payments.”

ED said it will continue to monitor servicer performance.


Publication Date: 1/8/2024

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