CFPB Projects Re-defaults in Rehabilitated Student Loan Borrowers

On October 17, 2016, the CFPB Student Loan Ombudsman released its annual report on transitioning student loan borrowers from default to income-driven repayment plans. The report highlights a number of servicing and debt collection practices that the CFPB believes could lead to the re-default of one third of all rehabilitated student loan borrowers within two years of rehabilitation.

The report cites Department of Education estimates that more than 8 million student loan borrowers have gone 12 months or more without making a required monthly payment, and more than one in four student loan borrowers are past-due or in default. Most defaulted student loan borrowers have the right, however, to “rehabilitate” their loans and get back on a payment plan. But the CFPB has received complaints about every step of the process for getting out of default and into an affordable repayment plan. The major problems cited by the CFPB include:

• Servicing failures such as delays in approving borrowers for income-driven plans
• Debt collection failures such as incorrect monthly payment amounts and the failure to apply monthly payments toward loan rehabilitation
• Misaligned debt collection incentives that encourage short-term results over long-term rehabilitation
• Conflicting communication about monthly payment amounts and where to submit payments, and payment shock when servicers bill much more than agreed

The report called on policymakers and the industry to simplify the student loan rehabilitation process and to take action to prevent borrowers from slipping through the cracks.

The Ombudsman also sent student loan servicers a voluntary information request regarding the performance of previously defaulted student loan borrowers, stating that this information may help the CFPB assess how practices differ among companies.

The report can be accessed here:  http://files.consumerfinance.gov/f/documents/102016_cfpb_Transmittal_DFA_1035_Student_Loan_Ombudsman_Report.pdf.

The CFPB’s press release can be accessed here: http://www.consumerfinance.gov/about-us/newsroom/cfpb-projects-one-three-rehabilitated-student-loan-borrowers-will-re-default-within-two-years/.