Another Way Student Loans Are Like Mortgages: Subpar Servicing

Oct. 24: This post has been updated to include a comment from Sallie Mae.

The parallels between the mortgage market and the student loan industry have been frequently noted. Both involve big borrowing and have a history of lax underwriting by lenders. But the two are also strikingly similar in another way: When it comes to both mortgages and student debt, the servicers, or companies that handle loan payments, sometimes add roadblocks and give struggling borrowers the runaround.

That's the main takeaway from two recent reports by the Consumer Financial Protection Bureau, the independent agency created by the financial reform law passed in 2010.

Servicers have misapplied payments, given borrowers bad advice, and reported incorrect information to credit bureaus, according to one of the reports. The findings were based on the agency's recent tracking of student loan complaints, focusing on the companies who handle private student loans.

Borrowers facing hardship and looking for flexibility through refinancing or a more manageable repayment plan "struggled to get an answer from their lender or servicer," wrote the agency's Student Loan Ombudsman, Rohit Chopra. When they tried to postpone payments, they were sometimes charged a recurring fee to do so.

And even when servicers encouraged borrowers to make "good faith" partial payments in amounts they could afford, the payments sometimes still resulted in delinquency or default, according to the report.

As we've noted in our reporting, private loans often don't have the same protections as federal loans: Death and disability discharges typically are not guaranteed or are decided on a case-by-case basis.

And when the loans are packaged and sold to investors, it's even harder to know who has the authority to make decisions about repayment options, discharges, or other issues that arise: "Borrowers report that sometimes servicers cannot even answer who owns a loan," noted an agency factsheet. Homeowners have faced similar trouble.

Sometimes, the parallels are exact. By law, members of the military are entitled to special protections, including lower interest rates on both mortgages and student loans. But thousands have been overcharged on their mortgages. And according to the government's second report, service members have also had the same problem with student loans. The report, which focused exclusively on the loan debt of military borrowers, blamed the overcharging on servicing errors and demands for unnecessary documentation.

The report also noted that loan servicers at times "guided" members of the military into putting loans into deferment or forbearance — even though interest accrues during those periods, and there may be better options available.

Of the more than 2,000 consumer complaints received by the CFPB from March and September of this year, the two most complained-about servicers were Sallie Mae, representing 46 percent of complaints, and American Education Services, or PHEAA, with 12 percent.

(The complaints, the report noted, were not "particularly disproportionate" to each companies' servicing volume. Sallie Mae has "modified $1.1 billion in private education loans with interest rate reductions or extended repayment since 2009," said spokeswoman Patricia Christel. A spokesman for American Education Services, Mike Reiber, said the servicer's customer service representatives "work daily with borrowers to explain repayment options and to help them avoid delinquency and default using all available means.")

Though the focus was on the servicing of private student loans, it's worth noting that many of the companies servicing loans in the private market are the same contractors handling federal loans.

Perhaps unsurprisingly, borrowers of federal student loans have also faced some of the same challenges as those with private loans. For instance: Since last fall, the Department of Education has been transferring some borrowers to new servicers it's contracted with to handle federal student loans — often resulting in confusion for borrowers, some of whom have even seen their repayment plans changed.

Currently, the Department has roughly a dozen servicers, with a new company added to the federal loan servicer team every few months. The expanding system of federal loan servicing can be confusing not only for borrowers who've been switched to new companies, but also for colleges who now have to deal with many more companies than they had to in the past.

The CFPB's report recommended that Congress assess whether more could be done to improve the quality of loan servicing and consider ways to encourage loan modifications and refinancing for struggling borrowers. Such efforts have been underway to help struggling homeowners, with mixed results.