Student Loan Borrowers Face Needless Hurdles When Trying To Reduce Payments

Image courtesy of Steven Depolo

It’s a fact of life: if you take out thousands of dollars in federal student loans to attend college, you have to pay them back. While the government offers borrowers some relief through free income-based relief, a new report shows that getting that assistance is often a test of patience for consumers, with servicers providing incorrect information or creating difficult hurdles. 

The Consumer Financial Protection Bureau released a report [PDF] Thursday highlighting complaints from student loan borrowers when it comes to trying to take advantage of income-driven repayment plans with their federal student loans.

The most frequent complaints from borrowers involved prolonged processing delays and servicers who mistakenly rejected applications for the plans. These problems often result in increased interest charges and lost eligibility for certain federal benefits and protections.

“Student loan servicers continue to fall short when it comes to helping borrowers address $1.3 trillion in student debt,” CFPB Director Richard Cordray said in a statement. “It’s time servicers focus more effectively on processing applications for income-driven repayment plans properly.”

Starting in 2009, the federal government created a program that allows borrowers of federal student loans the right to set their payments based on their income and family size.

The plans were created as a way to provide relief to borrowers who face financial hardships or earn low wages.

In addition, the federal government forgives the remaining balance on loans after the borrowers have made timely payments for 25 years, or in some cases 20 or even just 10 years.

According to the report released Thursday, five million student borrowers were enrolled in the income-driven repayment plan as of the first quarter of 2016.

Still, the report suggests that millions of students are likely missing out on their chance to participate in these plans because of missteps by servicers that collect payments and provide information to consumers.

Between Oct. 1, 2015 and May 31, 2016, the CFPB received 2,400 federal student loan servicing complaints related to access to the income-driven plan.

Among the issues that consumers report facing:

• Application abyss: Generally, the income-driven repayment application process should take no more than two weeks, according to the CFPB.

However, borrowers reported that their applications are unanswered for weeks or months at a time, leaving them to linger in an application abyss.

The delays can cause borrowers to lose out on protections that can lower their monthly payment, save them money on interest charges, and start them on the path to loan forgiveness.

• Repayment rejection: Some borrowers tell the CFPB that they were rejected for the plan because of issues with their servicers, such as lost or incomplete paperwork.

Other borrowers report being rejected simply for checking the wrong box, without being given the opportunity to submit a corrected form.

These errors discourage borrowers from restarting the application process, and some borrowers may choose to walk away from their loan, instead of remaining on the road to repayment, the CFPB says.

• Recertification replay: Because borrowers enrolled in the income-based repayment plan must reapply each year more issues can arise during this process.

For example, borrowers say that while they may not have had problems enrolling previously, when they go to rectify, their applications are delayed or wrongfully rejected.

• Costs of thousands of dollars over the life of the loan: On average, the report found that processing delays cost borrowers more than $2 per day, which can add up to thousands of dollars during the life of a loan.

In an attempt to prevent such issues in the future, the CFPB today released a “Fit It Form” that servicers can use to help borrowers understand whether their income-driven repayment application has been approved, denied, or needs to be corrected.

When a borrower needs to make a correction or provide more information, servicers can use the Fix It Form to help consumers understand how to “fix it” and stay on track.

While the form is a step in assisting borrowers in finding relief, consumer advocates say the slew of complaints aren’t surprising.

“We have said time and again that the lack of industry wide standards for education loan servicers results in unfair treatment of borrowers in frequent cases,” Suzanne Martindale, staff attorney with our colleagues at Consumers Union, tells Consumerist. “Furthermore, it can undercut the repayment benefits that federal borrowers should have by law.”

Still, Martindale urged the CFPB to continue highlighting these problems while working with stakeholders and consumers to create comprehensive rules.

“Based on this research, we believe that CFPB is best positioned to set ground rules for all servicers of education loans, whether federal or private,” she said. “We encourage the CFPB explore regulations in this area, to better ensure fair and consistent treatment of all student loan borrowers.”