Journalism in the Public Interest

Another Way Student Loans Are Like Mortgages: Subpar Servicing

The companies handling private student loans — much like those handling mortgages — sometimes add to the frustration and even the debt load of struggling borrowers.


Two recent government reports found that the companies handling private student loans sometimes add to the frustration and even the debt load of struggling borrowers. (File photo, Christopher Furlong/Getty Images)

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.

Student debt is stunting the growth of the economy. Student loans have increased by 275% over past decade. As the next generation graduates from college, they are plagued by insurmountable debt that places demands on their income, limiting their ability to spend their earnings in ways that stimulate the economy.

It occurs to me that, like with the mortgage crisis, if student loans are being bought and sold, then there are parties involved in the transactions (directly or indirectly) with a vested interest in students failing to pay up.

If that’s the case, then what actions are these parties taking to protect their investments?  I’m guessing they’re not doing anything to help.

Also, if nobody knows who owns a loan, doesn’t that mean that anybody demanding payment without the promissory note in-hand is committing fraud?  I know there were a few cases where foreclosure proceedings were blocked because the bank couldn’t produce any paperwork with the homeowner’s signature on it.

Really, though, it’s interesting seeing the financial and educational industries act like such caged animals.  It doesn’t say much for the future of either.

clarence swinney

Oct. 25, 2012, 12:15 p.m.

off subject pardon me
show a better record—no wonder Obama is using him—had Gore he would have won—

GDP—rose from 6300 to 11,600
NATIONAL INCOME-5,000 to 8,000 Billion—took 20 years to grow 2500B before Clinton
JOBS CREATED—over 22 million—record by far
AVERAGE WEEKLY HOURS WORKED—never hit 35.0—hit that  mark 4 times in 80’s
UNEMPLOYMENT—from 7.2% down down down to 3.9%
WELFARE TO WORK—11,533,710 on federal roll in 1996 and 3,880,321 in 2007.
MINIMUM WAGE—$4.25 to $5.15
MINORITIES—did exceedingly well
HOME OWNERSHIP—hit all time high
DEFICIT—290 Billion to whoopee a SURPLUS
DEBT——+28%—-300% increase over prior12 years
FEDERAL SPENDING—+28%—-80% under Reagan- who da true conservative?
DOW JONES AVERAGE—3,500 to 11,800  all it’s history to get to 3500 and Clinton zooms it
NASDAQ—700 to 5,000—-all of it’s history to get to 700 and Clinton zooms it
VALUES INDEXES—almost all bad went down—good went up in zoom zoom zoom
FOREIGN AFFAIRS—Peace on Earth good will toward each other—-Mark of a true Christian—what has Bush done to Peace on Earth?
POPULARITY—-highest poll ratings  in history during peacetime in  AFRICA, ASIA AND EUROPE even 98.5% in Moscow—left office with highest gallup rating since it was started in 1920’s.
STAND UP FOR JUSTICE—evil conservatives spent $110,000,000 on hearings and investigations and caught—- ONE—- very evil man who took a few plane rides to events.
BOW YOUR HEADS—Thank you God for sending us a man of Bill Clinton’s character, intelligence, knowledge of governance, ability to face up to crises without whimpering and a great leader of the world.
more goodies—google—clarence swinney + 113 clinton—+ clinton vs reagan (wipeout)—+-leader comments on Clinton + terrorism

clarence swinney

Oct. 28, 2012, 4:15 p.m.

Ruined our great Savings and Loan Institution
Closed Fairness Doctrine that has Limbaugh types on our public airwaves
Closed Revenue Sharing
Since 1980, initiated our involvement in 10 foreign conflicts
Repealed Glass Steagall—took deposits in over 7000 banks and put 50% in 5 (Too Big To Fail)
and 80% in 10 (Too Big To Fail) Banks.
Modernization of Commodity Markets—from investment to Casino Derivative Of America
2 very dumb invasions of two of most unarmed and destitute nations.
Ruined our International reputation as a Do Good Christian nation to Big Bully Devil
Stood by as freak marketeers ruined our housing industry
Stood by as Casino Derivative Of America ruined the world financial industry
Impeached a great president for petty political gains that created a long term animosity between the parties
Attempted to destroy the safety nets that make a great middle class
Implemented Tax Codes that permitted a redistribution of Wealth to top (10%) who now own (73% )of Net Wealth and (83%) of Financial Wealth and take (50%)of all individual income
They have taken America to a rank of (#2) as Least Taxed in OECD nations; (#2) as least taxed corporations; and sadly to (# 4) on Inequality.
Since 1980, their Spend & Borrow policies, mainly, were responsible for adding 14,000 billion to our 1000B Debt when they started in 1981.
Fought the Great GI Bill.
Fought the WWII Draft
Installed strict laws which have loaded our prisons with non-violent offenders which make us world leader in prison population

This article is part of an ongoing investigation:
College Debt

College Debt

Total outstanding college debt is estimated at $1 trillion dollars – and with costs still soaring, the burden on students and their families shows no signs of abating. We're examining how the complicated system of college debt is putting the squeeze on families.

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