Paying off student loans plague many consumers for decades. It’s upsetting that those who issue the loans often use questionable practices.
A report by the Consumer Financial Protection Bureau or CFPB of its supervisory activities describes a range of unlawful activities identified by its examiners across student loan markets. The report, released Tuesday, covers violations related to student loan refinancing, private lending and servicing, debt collection, and federal loan servicing.
“Companies break the law when they mislead student borrowers about their protections or deny borrowers their rightful benefits,” CFPB Director Rohit Chopra said in a statement. “Student loan companies should not profit by violating the law.”
Student loans are the second-largest type of U.S. consumer debt at more than $1.7 trillion in total outstanding balances.
In the past year, many student borrowers faced challenges, including as 28 million federal student loan borrowers returned to repayment following the end of the covid-19 payment pause, Chopra said.
The report describes how CFPB examiners identified companies engaging in illegal practices across student loan markets, including:
- Lenders misleading borrowers and failing to carry out their instructions for refinancing: Federal protections are lost when federal loans are refinancing or consolidating through a private lender. CFPB examiners found that lenders gave the impressions that borrowers who refinance might still be eligible for federal loan cancellation programs.
- Private lenders deceiving borrowers or denying benefits: Agency examiners found that lenders denied applications to dismiss the loan for eligible borrowers who were disabled. Lenders also falsely claimed certain borrowers weren’t eligible for autopay discounts or falsely advertised to borrowers that they could suspend their loan payments if they lost their job, but later eliminated this benefit.
- Servicers failing to address claims of school misconduct: Many private student loans made directly by schools include terms allowing borrowers to challenge their loans due to school misconduct, regardless of who holds the loans. CFPB examiners found that servicers misled borrowers about their right to challenge their loans and failed to properly consider most borrowers’ challenges to their loans based on school misconduct. The CFPB directed the servicers to create effective systems for evaluating borrowers’ claims of school misconduct.
- Servicers contracts allowing illegal collection tactics: CFPB examiners uncovered loan contracts with terms that would allow schools to illegally withhold students’ transcripts or access to classes and other education services in the case of default. Some servicers also falsely threatened students with legal action.
- Federal loan servicers harming borrowers during return to repayment: CFPB examiners observed that federal loan servicers failed to provide, for extended time periods, adequate ways for borrowers to manage key loan issues by phone. Servicers also issued deceptive billing statements with incorrect payment amounts and due dates, and unauthorized amounts added. Examiners also uncovered many problems with how servicers processed borrowers’ applications for repayment plans based on income.
Chopra said when CFPB examiners find problems, they share their findings with companies to help them correct violations. Usually, companies take actions to fix the problems. For more serious violations or when companies fail to take corrective actions, the CFPB opens investigations for possible enforcement actions.
In November, the CFPB released the annual report of the student loan ombudsman, highlighting the severe difficulties reported by student borrowers due to persistent loan servicing failures and program disruptions.
Consumers can submit complaints about financial products and services by visiting the CFPB’s website or by calling 855-411-2372.
