You can easily get trapped in college loans.
Colleges are lax at informing you how much you'll pay back and how much the total cost will be. The government is doing an inadequate job of telling you about repayment options. Some 40 million Americans may be stuck in this trap.
After researching this subject for nearly a year, I'm seeing myriad abuses in the student loan collection business.
When I was talking to a Chicago college class recently, I asked how many people had student loans (nearly everyone raised their hands). Then I asked if they'd been counseled on loan repayment options. Not a single hand went up.
As student debt climbs over the $1.2 trillion mark, more and more graduates are defaulting, which is preventable with some key knowledge and counseling.
Here's a summary of some of the worst practices in the student debt collection business:
* Deceptive advertising by debt "relief" firms lures graduates into paying hundreds of dollars for free loan consolidation applications.
* Private lenders routinely ignore their clients and refuse to negotiate better repayment terms.
* Debt collectors are harassing debtors in default, a blatant violation of federal law.
* Loan servicers are not informing clients of cheaper repayment options.
All of these problem areas are well known to federal agencies like the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB). The Illinois Attorney General recently sued several loan relief companies for deceptive practices.
The CFPB has been most active in trying to police student loan abuses.
In a CFPB field hearing in Milwaukee today, CFPB director Richard Cordray stated:
"At every stage of the process of paying back their student loans, borrowers have told us they are wrapped in mounds of red tape, particularly for private student loans. From the beginning, when they first graduate and start making their initial payments, consumers can experience problems with payment posting, problems with attempted prepayments, and problems with partial rather than full payments.
When borrowers do seek any sort of help, the range and severity of their problems can quickly snowball. They have told us about lost paperwork, unanswered inquiries, and no clear path to get answers. They also find that when errors are made, they may not be fixed very quickly. They may encounter limited access to basic account information, including their payment history over the years.
One borrower told us, for example, that she made her payment on-time and in-full each month through an automatic payment system established by the lender but still faced problems with unexpected fees. Once again, these kinds of problems are not new to loan servicing in general, and in particular they have happened repeatedly in the mortgage servicing market over the past decade.
The stress can get even worse when loans change hands from one servicer to another. Transfers are very common in this market, and the consumer has no control over it. Between 2010 and 2013, more than 10 million student loan borrowers had their loans move from one servicer to another for various reasons other than consumer preference.
One person told us that after seven years her account was switched to another company. Suddenly, she stopped receiving paper statements and since then has had to call the new servicer each month to confirm her payment amount."
For those of you who have loans, does any of this sound familiar?
While the CFPB continues to investigate these problems and the Department of Education is considering reforms. When I asked the FTC what they were doing, a FOIA officer said they didn't have the staff to follow up on more than 1,000 complaints on debt collectors.
The CFPB, created by the Dodd-Frank financial reform law in the wake of the 2008 Wall Street meltdown, has been soliciting comments on student loan abuses. Here's what they are looking for:
Industry practices that create repayment challenges: The CFPB’s inquiry seeks information about specific practices that could potentially create problems as consumers repay their loans. The inquiry seeks information on whether consumers are harmed by billing error dispute processes, whether payments are applied in a way that maximizes fees or increases the amount of interest paid, and if the borrower receives enough information when a loan is transferred between servicers.
Hurdles for distressed borrowers: The CFPB estimates that there are nearly 8 million borrowers in default, representing more than $110 billion in balances. Today’s public inquiry requests information on whether servicers’ policies and procedures are resulting in struggling borrowers paying more fees or prolonging repayment. It seeks information on whether these policies and procedures are driving borrowers to default on their loan.
Economic incentives affecting the quality of service: The CFPB is seeking information on whether the typical ways that servicers are paid may indirectly lead to borrower harm. The model used in most third-party servicing contracts provides student loan servicers with a flat monthly fee per account serviced. This fee is generally fixed and does not rise or fall depending on the level of service a particular borrower requires in a given month. The CFPB’s inquiry seeks information on whether student loan servicers have adequate economic incentives to take the time to enroll borrowers in flexible repayment options or help them avoid default.
Application of consumer protections in other markets: For student loan borrowers, there are no comprehensive federal regulations to ensure standards for the servicing of their loans. The CFPB is analyzing whether there are protections in other consumer credit markets – such as credit cards or mortgages – that could inform policymakers and market participants when considering options to improve the quality of student loan servicing. For example, servicers in some other markets are subject to more stringent rules that include early intervention for delinquent borrowers, protections when loans are sold, written acknowledgement of disputes, and limits on certain fees. A recent Presidential Memorandum requested that the Department of Education consider, in consultation with the CFPB and the Department of the Treasury, whether these other markets should inform potential student loan servicing standards.
Availability of information about the student loan market: The CFPB is looking at whether a general lack of transparency in the market may be contributing to consumer harm. The Bureau is seeking information on whether there is adequate information available about how the market is functioning to determine whether servicers are providing help to those repaying their loans and those struggling to avoid default.
What You Can Do
Of course, if you're stuck in college loan repayment purgatory, you can't wait for a regulator to act. Here are some things you can do:
* Know the truth about loan forgiveness.
No matter what you see on the Internet or in mobile phone ads, federal loans can only be forgiven in limited circumstances.
If you've entered into teaching, public service or the military, you may qualify after a period of time, provided you meet certain requirements.
The Department of Education spells out forgiveness terms here.
* You need to talk with your servicer until you get what you need.
There are thousands of stories of debtors who've gotten the runaround. Be persistent and keep track of your paperwork.
If you want to put some heat on them, file complaints with the CFPB.
I heard from at least one graduate who got some action in reducing her loan payments when the CFPB got involved.
* Know the limitations on private loans.
As a rule, I would avoid private loans, period. They are not required to offer repayment options and incredibly difficult to persuade to sweeten the loan terms.
If you're in dire circumstances -- such as permanently disabled and unable to work -- you could discharge private loans in bankruptcy.
But you'd have to find a lawyer who will be able to prove that you're completely unable to pay back your loans. Although it's not impossible, it's a rare event.
At the very least, find help from non-profit firms that understand student loans and won't charge you anything for assistance.
The National Consumer Law Center provides some help here.
Most of all, don't let your repayment issues linger. If you slip into default status due to nonpayment, your wages could be garnished and you'll get even more behind. Get on top of it today.
