The Consumer Financial Protection Bureau has turned a critical eye toward higher education's monetary ecosystem recently.
This month, it scrutinized the deals colleges strike with banks. But it's been investigating other aspects of the sector as well.
That follows a September publication about student loan servicers — companies that administer federal student loans. The document paints a picture of an industry where deceptive and abusive practices have been common, and where borrowers may not get the debt relief to which they’re entitled.
Ben Kaufman, director of research and investigations at the Student Borrower Protection Center, said colleges should be aware of the findings and understand the lending landscape they are bringing students into when they encourage them to take out loans.
“College requires debt for most people,” Kaufman said. “If you’re a school administrator and you know full well that the student loan servicing system is broken and likely to lead to harm for your students, I would sure hope that you’d be thinking about that when you are made aware of how much debt they are taking on to attend your school.”
Here are top findings from the CFPB regarding student loan servicers:
Erroneous loan forgiveness determinations
Part of the job of a student loan servicer is fielding applications for loan forgiveness through the U.S. Education Department’s debt cancellation programs — programs that exist independently from President Joe Biden's broad-based debt cancellation and whose existence is much less controversial. But the CFPB has found several unfair, abusive and deceptive practices by servicers related to disbursing loan forgiveness.
Examiners discovered that loan servicers wrongfully denied some applications for Teacher Loan Forgiveness. Applicants worked for five years as a teacher at a qualifying school but were wrongfully denied because they wrote down dates in MM-DD-YY format, instead of the longer MM-DD-YYYY.
Similarly, in the case of Public Service Loan Forgiveness, or PSLF, the bureau noted servicers issuing erroneous denials and approvals of applications for relief. Even wrongful approvals may be considered unfair, according to the CFPB report, because they may lead borrowers to work longer for their employers under the belief that they are making progress toward loan forgiveness. Servicers also were found to have miscalculated borrowers’ estimated eligibility date or number of qualifying payments made, extending the life of their loans.
Other unfair PSLF practices
The CFPB found that some servicers intentionally hid useful information from borrowers. Servicers told some borrowers they were not eligible for PSLF because they had paid through an ineligible repayment plan — neglecting to mention they were in fact eligible for a slightly different loan forgiveness program, Temporary Expanded PSLF. One servicer’s training materials specifically instructed representatives to not start conversations about the temporary expanded program.
“Examiners identified calls where representatives told borrowers that there was nothing they could do to make years of payments under graduated or extended payment plans eligible for PSLF,” the CFPB reported. “In response to a direct question from a consumer about her nearly 12 years of payments, one representative explained that they ‘count for paying down your loan, but it doesn’t count for PSLF.’”
At least one servicer excessively put off processing Public Service Loan Forgiveness forms, with delays lasting almost a year.
COVID-19 payment pause misinformation
The CFPB found that at least one servicer deceived borrowers by implying that they were required to make payments through the COVID-19-related payment pause to qualify for PSLF.
Hundreds of consumers were affected by this situation, the CFPB reported. In the first year of the payment pause, 8% of borrowers whose loans were forgiven through PSLF made payments during the suspension and did not receive a refund of those payments.
Income-driven repayment problems
Servicers also manage enrollments into income-driven repayment plans, or IDR, which allow borrowers to pay a set percentage of their qualifying income toward their loans each month instead of a predetermined absolute dollar amount. The bureau found that servicers engaged in several unfair or abusive practices relating to income-driven repayment enrollment, including wrongfully denying IDR requests or inflating IDR payment amounts.
In some cases, requests were denied because the servicers wrongfully said the income documentation was not sufficient. In other cases, servicers miscalculated income or payments by including income that is meant to be excluded from calculations, such as spousal income.
Servicers also failed to inform borrowers who tried to recertify for certain IDR programs that they needed to provide additional income information. As a result, at one servicer, only 12% of applicants for recertification provided the correct documentation. Of the 88% that were denied for that reason, 74% were delinquent on their debt six months later.
In other cases, borrowers attempting to recertify were told they could not do so because of federal action regarding anniversary dates by which they were supposed to recertify their income. In reality, they were ineligible because of income increases. That meant that borrowers were unlikely to reapply if their income fell.
Examiners also found that servicers deceived borrowers who had Parent PLUS loans, saying that those consumers were not eligible for IDR or PSLF. In fact, Parent PLUS loans are eligible for some specific IDR and PSLF programs if they are consolidated.
Transfers
In July 2021, two loan servicers — the Pennsylvania Higher Education Assistance Agency and Granite State — announced they would no longer be in the business of servicing federal student loans. That meant that 9 million borrower accounts would need to be transferred to other servicers.
Many servicers who received transferred accounts said the data provided was insufficient to service the loans, the CFPB report said. One servicer sent notices to 500,000 borrowers containing incorrect information about due dates and when federal loans would return to repayment. Some servicers were inadequately staffed to handle the transfer at the same time as other program changes were being put in place, meaning call and processing times increased significantly.
Kaufman said major problems similarly occurred in the early 2010s after Affiliated Computer Services — another loan servicer — lost its contract with the Education Department, and 35 million loans were transferred to other companies.
The CFPB, he said, should more severely penalize servicers found to have engaged in abusive or deceptive practices.
“Why are we reading about this in an anonymous supervisory highlights document and not in the press release of an enforcement action?” Kaufman said. “Part of the answer to why student loan servicing is so broken is that the companies that perpetuate the harm onto people don’t get held accountable.”
