Borrowers With Federal Student Loans Made By Private Lenders At Greater Risk For Default

Consumers who took out federal student loans through private lenders are more likely to default on their debts than their counterparts who received federal loans through the Department of Education, in part because these borrowers have difficulty obtaining adequate information on repayment options. 

That’s according to the Consumer Financial Protection Bureau’s recently released annual report [PDF] on student loan complaints.

The report, compiled by Acting Student Loan Ombudsman Seth Frotman, raises concerns about repayment problems facing those with older federal student loans that were made by banks and other private lenders.

Although the government issues the bulk of federal student loans now, that wasn’t always the case.

Before 2010, private lenders made provided most federal student loans to borrowers though the Federal Family Education Loan Program (FFELP).

Under the program, loans (Federal Stafford, PLUS, and Consolidation Loans) were made through a public/private relationship involving borrowers, schools, lenders, and the federal government; private lenders (such as local banks or credit unions) provided the money for the loans and the federal government subsidized and reinsured the loans

While that program has since ended, many borrowers still owe the balances on their loans.

“These loans were once the most common way to borrow for college and borrowers with these loans still make up nearly a third of all student loan borrowers— owing more than $370 billion in outstanding debt,” Frotman says in a blog post.

Borrowers tell the CFPB that they have had difficulty obtaining accurate information from lenders about these older debts, which has often led to loan defaults and missed payments.

In fact, the CFPB estimates that at least 30% of FFELP borrowers are behind on their loans or are already in default.

While the student loan borrowers are eligible for plans aimed at making it easier for them to repay their loans, the report found 95% of FFELP borrowers are not enrolled in income-driven repayment plans.

According to the CFPB, this is often because borrowers have run into issues having paperwork processed on time.

“I have a loan with [servicer] and I have not been given any help dealing with my payment options. I have filled out applications for an [income-based repayment plan] and forbearance,” one borrower tells the CFPB. “Customer service is constantly giving me false information and not helping me to get my payments lowered…They are not helping me to resolve this payment to a payment that I can afford.”

The CFPB sees this lack of assistance and accurately disseminated information obtained by borrowers of older student loans to be “continuing signs of student debt stress.”

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