CFPB: Federal and Private Loan Borrowers Face Obstacles to Enrolling in Alternative Repayment Plans

By Allie Bidwell, Communications Staff

Federal student loans issued by private lenders before 2010 may be more likely to be delinquent or in default than student loans overall, according to an annual report on student loan complaints released Wednesday by the Consumer Financial Protection Bureau (CFPB).

The report, which tracked 6,400 private student loan complaints and 2,300 debt collection complaints about private and federal loans, found that at least 30 percent of borrowers with loans from the Federal Family Education Loan Program (FFELP) – more than 5 million borrowers – are already delinquent or in default on their loan payments. The CFPB last month released a report on student loan servicing issues, and revealed that more than 25 percent of student loan borrowers overall are delinquent or in default.

In addition to the findings related to the FFEL program, the report showed that the number of private student loan complaints has grown by about 23 percent in just one year, and that both private and federal loan borrowers continue to report problems with enrolling in flexible repayment plans, including income-driven repayment plans available to federal borrowers.

Despite the fact that FFEL borrowers are generally eligible to enroll in income-driven repayment plans, fewer than 6 percent are enrolled in one, the report found. By comparison, borrowers with Direct Loans enroll at nearly three times that rate, according to the report.

“We are particularly concerned about repayment problems facing those with older federal student loans that were made by banks and other private lenders,” Seth Frotman, acting student loan ombudsman, wrote in a blog post. “We found that servicing issues may make repaying student debt even harder for this group of borrowers, in particular.”

Many of the reported obstacles are related to servicing issues.

Borrowers with private student loans, for example, reported to the CFPB that they have been unable to find information about joining an alternative repayment plan, or received conflicting information about their eligibility to enroll.

Federal loan borrowers, on the other hand, reported that they were unable to enroll in income-driven repayment plans, despite the fact that they submitted the required paperwork to do so. Federal borrowers also said they had issues with receiving information about how to recertify for their income-driven repayment plans.

Frotman wrote in the report that student loan servicers might not have the necessary incentive to help borrowers in distress and direct them toward alternative repayment plans because their compensation fees are fixed regardless of whether the borrower is in repayment, in repayment but not current, or in forbearance.

“Notably, the effects of this compensation structure on servicing practices may also contribute to other problems identified by student loan borrowers experiencing financial distress,” the report said. “Borrowers have stated that servicers may encourage them to enroll in programs designed to provide short-term relief rather than those designed to lower monthly payments over a longer time period.”

Frotman wrote that the new report supports the CFPB’s previous calls for widespread standards among student loan servicers. He also called for an increase in the amount of data available to include servicer-level performance metrics on data points including default, delinquencies, forbearance, and repayment plan utilization.

“Robust performance metrics can better position policymakers and market participants to target resources to assist at-risk consumers and can inform future initiatives to establish industrywide standards for the servicing of students,” the report said.


Publication Date: 10/15/2015

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