One in three rehabilitated student loans borrowers will default — again — within two years. That’s according to a new report out from the Consumer Financial Protection Bureau’s (CFPB) Student Loan Ombudsman.
The reason for this possible re-defaulting is the potential gaps between student loan programs. The worse news is that the bureau is estimating a cost to consumers over the next two years of $125 million in unnecessary interest charges.
The CFPB report looked at 300 companies, including student loan servicers, debt collectors, private student lenders and other organizations between Oct. 1, 2015, and May 31, 2016. About 5,500 private student loan complaints were handled by the bureau, with 2,300 debt collection complaints regarding private and federal student loans.
Within that timeframe, just since March 2016, more than 3,900 federal student loan servicing complaints came into the bureau. The bottom-line takeaway was that borrowers encounter a tremendous number of problems related to their student debt.
As a result of this report, the bureau is demanding an overhaul of these programs in order to help millions get back on track financially. The bureau said that, under federal law, consumer protections should make it almost impossible for even the most vulnerable consumers to default, despite this report showing that it is indeed easier for defaults like these to happen to people.
“Too many student loan borrowers are being left behind due to breakdowns in the federal programs designed to provide them a fresh start, including an affordable monthly payment and a path to long-term success,” said CFPB Student Loan Ombudsman Seth Frotman in a statement. “This report offers further evidence that industry practices and needless red tape can turn a student loan into an unbearable burden. Policymakers should work to reform the programs that are failing those borrowers that need help most.”
Over the last 10 years, with more students — upwards of 44 million — taking out loans, more money is now owed.
The CFPB’s recent estimate totals about $1.4 trillion in outstanding federal and private student loans, most being the former. That significance is compounded as the Department of Education has estimated that there are more than 8 million student loan borrowers who have not paid the monthly required payment in over a year. Of that 8 million, about 1.2 million defaulted on their loans last year, which typically results in wage garnishment, loss of federal benefits and negative credit history.
All in the name of student loans.
Borrowers have made complaints to the CFPB regarding payment plans and other ways of getting out of a default. The key issues that these borrowers face, according to the CFPB report, include, but are not limited to, debt collection practices with incorrect monthly payment amounts, misaligned debt collection incentives and failure in communication related to the process of payments, causing confusion of the system.
The bureau’s Student Loan Ombudsman is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act to offer recommendations and options to the CFPB director, the secretary of education, the secretary of the Treasury and Congress.
Because of the broken system and its practices, the Student Loan Ombudsman has made recommendations to policymakers and the industry for improving a recovery process with options for those borrowers.