The report: Issue Spotlight: Federal Student Loan Return to Repayment
Published: January 2024
Source: Consumer Financial Protection Bureau
Why we picked it: Federal student loan debt was a mammoth burden even before the pandemic-era pause on payments implemented by the Biden administration. Nearly 11% of Americans have had student loans in forbearance since the 2020 pause, so any development on this front is prime news to consumer and mortgage lenders.
Administration attempts to extend the payments moratorium got shot down last year, although new efforts to reduce payments and overall debt have been introduced. Figuring out a given borrower’s overall debt under the newest arrangement isn’t straightforward. The government’s SAVE program — Saving on a Valuable Education — adjusts payments based on borrower income and family size, and includes an element of debt forgiveness after years of payback — all of which must now be calculated. (This is one of four federal “income-driven repayment plans.”)
Research by The Pew Charitable Trusts found that many federal student loan borrowers simply stopped interacting with their loan servicers during the almost three years of payment relief.
Four out of five told Pew in 2022 that they anticipated that once repayments resumed, they would be “somewhat” or “very” hard.
Pew has pointed out that given the hiatus, “clear communication from the Education Department and loan servicers regarding remaining balances, upcoming payment due dates, and new repayment options is necessary.” Pew makes the point in a recent blog that taking advantage of SAVE and other measures requires borrowers to take action themselves — it is not automatic.
Therein lies the rub. CFPB’s report indicates that getting in touch with student loan servicers has been growing more difficult. In a statement accompanying the bureau’s study, Rohit Chopra, director, claimed that many student loan servicers trimmed their customer service capabilities during the pandemic pause, in order to save costs. As payments have resumed, the bureau is examining and monitoring servicers, reviewing consumer complaints about servicers, and working to make them accountable.
Read more: Trends 2024: Prepare for Disruptive Activism from a Politicized CFPB
Executive Summary
The bureau puts it succinctly: “CFPB examiners have observed that student loan borrowers are facing long hold times when trying to reach their servicer by phone, significant delays in servicers’ processing of their applications for income-driven repayment, and inaccurate billing statements.”
The bureau indicates that its analysis of examiner findings is based on data gathered between August and October of 2023, so any more recent improvement in servicer performance is not reflected in the report. (Repayments restarted in October.)
The report also alleges that processing delays are denying some borrowers the full impact of the income-based repayment adjustments under SAVE — costing them money.
This tangled affair is of more than academic interest to other lenders. In the months ahead, student loan delinquencies could cascade and impact borrowers’ ability to pay other debt.
“Borrowers risk missing payments and other negative consequences when they cannot perform the tasks they need on their servicers’ websites nor reach the servicers by phone.”
Key Takeaways
• Given the long moratorium and the complex details, many borrowers need to talk to live representatives to figure out where they stand. The study indicates that during the last two weeks of October student loan borrowers seeking live help waited on average 73 minutes to talk to an agent. The report goes further, saying that these delays seemed to be present throughout call center hours, rather than just during peak demand.
Failing to provide adequate opportunity to reach help constitutes “an unfair and abusive act or practice,” the bureau claims, invoking its controversial “UDAAP” language.
• During the same October period, the long delays caused almost half of borrowers — 47% — to hang up before receiving help. The report acknowledged that that’s an overall finding, and that some servicers have much lower drop rates.
• By the end of October hundreds of thousands of income-based repayment adjustment requests had been pending for over 30 days. In addition, the slowest servicer is taking five times as long to process such requests as the fastest company.
• Many borrowers have been receiving billing statements containing errors, some listing due dates that occurred during the payments pause. A common error is incorrect income amounts, resulting in higher payments than warranted. Certain programs require a spouse’s federal student loan debt to be factored into payment calculations and the bureau says that isn’t always happening.
Read more: Washington Watch: 5 Issues Bankers Should Monitor in 2024
Our Take
What we liked: Tapping field examiners for an overall feel for what’s going on and reporting it publicly casts some sunlight on a controversial product area. Large providers and servicers in other credit products might take the criticisms as a guide for improvement — or a sign of the scrutiny and resulting reports their own call centers could receive.
What we didn’t like: CFPB has bragged about being a data-driven agency from the get-go. Somehow it seems like its case would have been stronger if November and even December data had been included. This would have addressed a niggling feeling that October might have reflected a period of adjustment to major change.
Things that made us go “Hmm”: The flood of claims for how artificial intelligence in both its traditional and generative AI forms will improve customer service was on our mind while reading this report. Would a massive dose of AI have helped the situation the report describes? Or could it have introduced issues of its own if GenAI picked up dated or erroneous input?
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