The millions of Americans facing problems with the companies servicing their student loans now have an angel looking over their backs.
The Consumer Financial Protection Bureau (CFPB), a government watchdog agency, will start exercising its considerable oversight responsibilities on companies that collect payments on student loans to see if they are breaking any laws beginning March 1.
Specifically, the CFPB will monitor any nonbank companies that have 1 million or more student loan service accounts. There are seven major companies that fit that category, including Sallie Mae, Nelnet Inc., ACS Education Services and American Education Service. These companies service 49 million student loans — or close to 70 percent of the $1.2 trillion in student loan debt.
Late Fees Are a Big Problem
The CFPB already has oversight responsibility for the bank companies that service student loans. The government is concerned that companies are trying to maximize late fees and are not properly crediting borrowers who try to pay off loans early.
“We have seen especially shameful examples of poor servicing when service members find themselves thwarted by burdensome paperwork and other obstacles,” CFPB Director Richard Cordray said in a prepared statement. “Many of these borrowers did everything right; they worked hard and made years of monthly payments, but still cannot find any help to get out of those high-rate loans.”
The CFPB said the complaints from consumers about student loans are similar to ones the agency heard from homeowners who had problems with companies servicing their mortgages: Lost paperwork, poor communication and processing errors that resulted in late fees.
“Student loan borrowers should be able to rest assured that when they make a payment toward their loans, the company that takes their money is playing by the rules,” Cordray said.
Oversight Throughout Loan Process
The new rule will allow the CFPB to subject loan servicers to formal examinations of internal procedures, data and other information. Cordray said his agency’s oversight will include all stages of the student loan process, from origination to servicing to debt collection and credit reporting.
The oversight will cover companies that service either federal or private student loans. Among the practices most closely monitored will be loan servicers misrepresenting or making false statements about repayment options or reneging on promises to discount interest rates.
The bureau could punish companies for conduct it deems unfair or deceptive.
“We know that student loan servicers can have a profound impact on borrowers and their families,” Cordray said. “We need to make sure they are complying with federal consumer financial laws.”
Default Rate Soaring
Estimates show that more than 7 million student loan borrowers are in default (failure to make payments for 270 consecutive days). That number is rising at the rate of about 600,000 a year, despite government efforts to offer ways out of default through various repayment plans.
Economists say that the rising levels of student loan debt are having a negative impact on the recovery. It is holding back the housing industry, limiting the mobility of college graduates and discouraging business start-ups.