A federal agency that ushered in a number of reforms to fix problems with mortgage servicing after the financial crisis is now weighing similar protections for borrowers of student loans. Next to mortgages, the $1.2 trillion outstanding balance on student loans comprises the second-largest source of consumer debt in the U.S.
The Consumer Financial Protection Bureau estimates that among 40 million student loan borrowers, about 8 million people are in default on more than $100 billion worth of student loans. Student loan servicers are responsible for collecting and processing payments, and for answering borrowers' questions about how to keep up with those bills. But the agency says it is concerned that those companies are a weak link when it comes to assisting borrowers in repaying that debt.
“As a growing share of student loan borrowers reach out to their servicers for help, the problems they encounter bear an uncanny resemblance to the situation where struggling homeowners reached out to their mortgage servicers before, during, and after the financial crisis,” CFPB director Richard Cordray said, according to prepared remarks he will deliver Thursday at a field hearing on student debt in Milwaukee.
Cordray’s agency is launching a public inquiry into student loan servicing to solicit feedback on industry practices that can either help young borrowers stay on track, and build a positive credit history through on-time payments, or create frustrating hurdles that may hasten default.
“Having seen the improper and unnecessary foreclosures experienced by many homeowners, the Consumer Bureau is concerned that inadequate servicing is also contributing to America’s growing student loan default problem,” Cordray stated.
Joining Cordray in Milwaukee will be Department of Education Under Secretary Ted Mitchell. The Education Department contracts with student loan servicers to handle a direct loan portfolio in which 28.5 million borrowers owed about $744 million by the end of 2014. But the department has been criticized for lax oversight of the servicers, and for not doing enough to prevent borrowers from defaulting, including by the department’s own Office of Inspector General.
Effective student loan servicing, however, is fundamental to President Obama’s student debt agenda. Last June, he signed an executive order to expand income-based repayment options, so that more borrowers can take advantage of repayment plans that are pegged to how much they earn. Whether or not a borrower is eligibile for such programs is the type of information a student loan servicer, typically, should be able to convey.
In March, Obama signed a “Student Aid Bill of Rights,” and directed the Education Department, the Treasury Department and the CFPB to assess the need for stronger student loan servicing standards. Currently, for both private and federal student loans, there is no equivalent of uniform federal regulations that govern credit card and mortgage servicing.