The CFPB’s Student Loan Ombudsman released a report on Wednesday that found that private student loan borrowers could face payment processing issues that could increase their costs, prolong repayment and hurt their credit scores.
“Repaying a student loan should be simple,” CFPB Director Richard Cordray said. “When servicers process payments to maximize fees and penalties, they undermine the trust of their customers. Student loan borrowers deserve better; they deserve transparency and accountability.”
The CFPB has received 3,800 complaints related to private student loans since October 2012, when it began taking complaints. The most common complaint related to borrowers’ ability to adjust their repayment terms during periods of hardship, while other complaints included problems with debt collection practices, problems covering a range of payment processing issues and general customer service problems.
“Since refinance options are limited, the only way to escape high rates or poor customer service is to pay off loans more quickly,” the CFPB report said. “This also reduces the total interest paid over the life of the loan. Many consumers face stumbling blocks, snags and surprises when it comes to payment processing practices.”
According to the report, many consumers encounter difficulties verifying whether payments are applied when they make additional payments to pay off loans more quickly. Generally, companies will first apply payments to outstanding fees and interest, while the remainder is allocated to cover principal.
Borrowers also reported confusion about payment policies regarding their “paid ahead” or “advanced payment” status, with questions as to whether funds have been held towards future payment or whether the servicer has applied the payment towards the principal.
When paying more than the minimum amount due, borrowers also faced significant difficulties when sending a single payment to cover several loans under the same servicer, noting that payments are usually not applied in a way that helps to pay loans with the highest rates off the quickest.
“Even when the payment is accompanied by an explicit instruction, the complaints revealed that many student loan servicers elect to apply extra payments as they see fit — and not necessarily in the way that offers the greatest benefit to the borrower,” the report said. “Borrowers report that the policies governing the treatment of payments when applied to multiple loans within one billing group are particularly difficult to understand and navigate.”
Consumers also face problems when making underpayments—payments less than the minimum due—because many appear to be applied by servicers in order to maximize late fees. In some situations in which a borrower has numerous loans in a single billing group with one servicer and is unable to pay the bill in full, he or she may submit a partial payment.
Servicers may pro-rate the payment and apply it across all the loans within the billing group, which would not satisfy outstanding accounts and would result in a late fee for each past-due loan, or the servicer could attempt to satisfy as many accounts as possible in full, thereby minimizing the number of past-due accounts and late fees.
“In cases where borrowers remit a single monthly underpayment, servicers’ payment application policies have both negative financial and credit implications for borrowers,” the report said. “Should servicers divide payments between consumers’ accounts, not only will this maximize late fees charged to the consumer, but the servicer may also choose to furnish information about the borrower’s delinquent loans to credit reporting agencies.”
The report recommends that lawmakers consider the application of credit card and mortgage servicing regulations to the student loan market.
“Unfortunately, significant problems unraveled in the mortgage servicing market that led to negative externalities for the broader economy,” the report said. “If industry fails to correct deficiencies in the student loan servicing market, policymakers may need to act to avoid further negative consequences for the economy.”