Federal regulators are weighing new rules for companies and agencies that service student loans, warning of “widespread servicing failures” hurting holders of the $1.2 trillion aggregate U.S. student debt.
The Consumer Financial Protection Bureau, the Treasury Department and Department of Education on Tuesday announced a set of principles to guide reform of the rules on student loans.
The principles include that servicers set clear expectations for borrowers, give students accurate information, publish data about student loans and face accountability for abuses of borrowers whether they’re private companies, nonprofits or government agencies.
The government’s move to re-regulate the student loan market comes after President Obama’s call in March for a student aid “Bill of Rights” and recommendations for new rules on servicers.
During Obama’s tenure, student debt has grown to the second-largest category of consumer borrowing, trailing only mortgages. Delinquency on the loans also has risen dramatically.
There are now 41 million student borrowers collectively owing more than $1.2 trillion, according to the consumer protection bureau, and more than a quarter are either delinquent or in default.
After requesting public comments regarding how student borrowers are treated by the companies and agencies that manage their loans and collect their payments, the bureau received 30,000 comments.
“With one out of four student loan borrowers struggling to repay their loans or already in default, cleaning up the servicing market is critical,” bureau Director Richard Cordray said. “Today’s report underscores the need for market-wide student loan servicing reforms to halt harmful practices and boost assistance for distressed borrowers.”
The anecdotes shared with the bureau hinted at a number of persistent problems. Many borrowers lack information about the terms of their loans and the options available to them if they are struggling to repay their debt, including government programs that cap payments as a share of income.
More than 10 million borrowers have seen their loan handed off between companies in the past five years, creating confusion about how to repay the debt. Many people also found roadblocks to refinancing. Other commenters described having their loans thrown into default, despite making payments on time, because a co-signer died or went bankrupt, damaging their credit.
Furthermore, veterans, disabled members of the military and disabled citizens have trouble accessing programs that can help them with their student debt, according to the comments.
The vast majority of student loans are either backed by the government and serviced by private lenders or made directly by the government and serviced by the Department of Education. Since 2010, no federally-backed student loans have been made through private lenders, but there is still roughly $350 billion in loans outstanding managed by those companies, according to the CFPB.
