Consumer agency opens inquiry on student loan servicing

Do companies that service student loans make more money when they provide less service? The federal government's consumer watchdog wants to see what changes can be made to help the 40 million people with student loan debt save money and avoid default.

The Consumer Financial Protection Bureau is opening a public inquiry Thursday into student loan servicing practices that it says can make paying back loans "stressful or harmful."

Private and federal student loan debt totals more than $1.2 trillion. Loans are often not serviced by lenders but by a company that processes monthly payments, assists borrowers with repayment options if they lose their jobs and performs other tasks. Such service companies — among them are Navient, Nelnet and American Education Services — typically get a flat monthly fee per account.

"Student loan servicers often make more money when they spend as little time as possible on each account, and they typically get paid more when a borrower is in repayment longer," Richard Cordray, the director of the agency, says in remarks prepared for delivery at a hearing Thursday in Milwaukee. "So we are evaluating whether the typical methods of servicer compensation can jeopardize the interests of borrowers."

Student loans are now the largest source of consumer debt outside of mortgages, according to Cordray. Two-thirds of graduates are finishing their bachelor’s degrees with debt that averages nearly $30,000, he added — a sum that can threaten the economic stability of young Americans and their future.

"Significant debt can have a domino effect on the major choices people make in their lives: whether to take a particular job, whether to move, whether to buy a home, even whether to get married."

Richard Hunt, the president and CEO of the Consumer Bankers Association, says his organization is looking forward to learning more about the effort. He says its member banks are "100 percent committed to student success and are regularly working to ensure their borrowers are aware of all options available to them."

Borrowers aren't necessarily being told about repayment plans that could keep them from defaulting, the federal agency says. Its ombudsman, Rohit Chopra, says there are about 8 million student loan borrowers in default, and a large number of them could have avoided default if they had enrolled in more affordable repayment plans.

"Adequate student loan servicing can mean the difference between getting by and going broke, and too many borrowers feel they don't always know how to navigate a complex and confusing industry," Chopra says.

The federal agency, which has oversight for the student loan industry, has other concerns. It says there have been consumer complaints such as servicers taking too long to process payments, losing paperwork, not fixing errors in a timely fashion, or not correctly handling pre-payment of loans.

There have been changes in recent years to address the quality in servicing of credit card and home mortgage loans. The agency is looking at how those industries are regulated and whether their regulations might be applicable to student loans.

The public has until July 13 to comment.

Al Jazeera and The Associated Press