The private student loan industry smells a lot like the subprime mortgage industry: Dead ends, runarounds and few live customer service representatives to speak with. The same tactics that mortgage borrowers have faced are now happening for student loan borrowers, according to a new report from the Consumer Financial Protection Bureau.
The government watchdog on Tuesday released its annual report on student loans, including details from a database of complaints that opened to student loan borrowers in March.
“Student loan borrower stories of detours and dead ends with their servicers bear an uncanny resemblance to problematic practices uncovered in the mortgage servicing business,” CFPB student loan ombudsman Rohit Chopra said in a statement.
Nearly two-thirds of the 2,857 complaints filed in the database had to do with repayment issues, including complaints about fees, billing, deferment, forbearance and fraud. Thirty percent of the complaints were about problems facing borrowers unable to pay. Few were related to getting a loan.
The report highlighted three servicing issues of particular concern: Surprises in loan terms and conditions; the runaround from servicers and difficulty contacting a person; and problems refinancing loans to take advantage of historically low interest rates.
Chopra called Tuesday's report an "early warning" for servicing problems how they may hurt borrowers' ability to repay.
The CFPB over the summer compared loan servicing problems in the student loan industry with the subprime mortgage industry.
Much like the mortgage industry, the student loan industry underwent a huge borrowing boom from 2004 to 2008, according to the CFPB. Student loan debt is now more than $1 trillion and private loans account for $150 billion of that amount. At least $8 billion of private loans are in default by about 850,000 borrowers, according to the report. Unlike a mortgage, however, student loan borrowers cannot discharge their debt in bankruptcy.
Chopra said many complaints in the CFPB database related to loans that originated before 2008. The Higher Education Opportunity Act of 2008 required better disclosure of fees on private loans.
The majority of complaints were directed at the seven biggest lenders. Sallie Mae, the biggest private lender for student loans, received the most complaints. The database does not currently include complaints about federal student loans.
The report included the CFPB's recommendations for policy changes to help borrowers manage their debt. Recommendations include helping more borrowers refinance to lower rates and creating incentives for income-based repayment programs.
Brendon McQueen, the 29 year-old-founder of San Francisco-based Tuition.io, an online dashboard for managing student loan payments, said servicing issues are a huge problem. McQueen, who owes $120,000 in student loans himself, said the biggest frustration he sees is a lack of communication from servicers.
"Just an email that your loan was sold and who to contact" would help, McQueen said. "That just isn't happening."