CFPB has thrown a warning flag on student lenders and student loan servicers, charging that many requests for relief under a special federal program have not been handled properly. Yet, as one high-ranking community bank niche student loan refinancer explains, there’s two sides to the workability—and potential results—of the relief setup.
Education loans are the second-largest consumer debt market in the U.S., accounting for nearly $1.3 trillion held by about 43 million Americans. CFPB estimates that one in four of those borrowers is either in default or struggling to pay.
How federal relief works
Relief is available through Income-Driven Repayment (IDR) plans that adjust the repayment rate according to the borrower’s income and family size. Additionally, if timely payments are made for a set number of years—usually 20 to 25, but in some cases, as few as 10—the remaining balance on a federal loan will be forgiven by the government.
Borrowers are typically eligible for an IDR if their federal student loan debt is higher than their annual income or if it represents a significant portion of their discretionary income —and most federal student-loan holders qualify. The discounts are often substantial; borrowers with very low incomes can have their payments reduced to zero. Presently, about 5 million student-loan holders are enrolled in an IDR and many others have applied.
Complaints around lack of relief
When CFPB recently analyzed the approximately 5,000 complaints about student loans it received between October 2015 and May 2016, it found that one of the chief complaints concerned IDRs. A notable complaint: Applications taking weeks or months to process, only to be rejected when applicants make mistakes on their paperwork.
Although federal loans represent the majority of student-loan debt, private servicers typically manage the repayments. CFPB Director Richard Cordray says that the complaints indicate that they are falling down on the job.
“Student loan servicers continue to fall short when it comes to helping borrowers,” the director said last week. “It’s time servicers focus more effectively on processing applications for income-driven repayment plans properly.”
To rectify the problem, Cordray announced the CFPB’s new “Fix It Form” that servicers can supply to borrowers to let them know the status of their IDR application or ways it needs to be corrected.
Similar information is already available on numerous other websites, including the FedLoan servicing FAQ page that answers such puzzlers as, “How Do I Fill Out the Application?” Nonetheless, CFPB is confident its Fix It Form can solve the problems and implies that servicers who don’t use it will be considered remiss.
“Servicers who want to better serve their customers can take the immediate steps recommended in this report to clean up this broken process,” the bureau said, claiming its Fix It Form will:
• “Ensure that all borrowers receive high-quality, timely service.”
• Help servicers explain to borrowers what is wrong with their application—“for example, if they are missing key information like signatures or if their income documentation is out of date.”
• Improve access to benefits by “bolstering applications and increasing the number of borrowers able to invoke their right to a federal income-driven repayment plan.”
Lender view on fixit effort
It’s unlikely that most servicers need so much coaching, according to Aryea Aranoff, head of strategy for lending at Connecticut-based Darien Rowayton Bank, which was the fastest lender to reach $1 billion in student loan refinancing, says. The decade-old community bank has made student loan refinancing a niche business.
“When it comes to these [IDR] programs, the servicers actually do know about them,” Aranoff said. “Because they’re servicing government loans and these are government programs, the servicers receive extensive training.”
Most of them process enough applications to recognize when something is wrong—and to return it if the information seems amiss.
“Without looking at the data themselves, it’s hard to know whether the borrower messed up,” Aranoff said. “But it’s certainly within the scope of the servicers’ job to process these and get them back to [borrowers] in a reasonable amount of time.”
Process can be challenging
One of the reasons there may be a conflict between what the CFPB considers reasonable and the amount of time servicers need is that keeping IDRs up to date is a never-ending process. To continue qualifying for payment reduction, borrowers must show that they remain eligible.
“Payments can go down to zero,” Aranoff explained, “but that doesn’t mean the loan is forgiven, because if your income goes up, your payment can too. The loan stays a loan.”
Even if a borrower’s income or family size has not changed in a year, they still must be recertified annually. And when their income or family size does change, they must notify servicers at that time of their new status. Not only might student-loan holders submit multiple IDR applications in a year, they may also have IDR plans with multiple servicers and must recertify with them all. The workload is exponential.
Aranoff said it’s important to understand that IDRs are “separate from the refinancing space because the programs that these borrowers are signing up for are not refinancing but are borrower benefits offered by the federal government for their current loan.”
As such, they are intended to be “temporary reductions to help borrowers get through periods of reduced income,” Aranoff said. Loan forgiveness is not quite the benefit it might seem, either, Aranoff added: While most student loans are forgiven after about 20 years, the borrower has to pay taxes on that windfall.
That evidently is a small price to pay for many borrowers, given how many are clamoring for IDRs and complaining to the CFPB when they don’t get one—complaints that could be resolved by CFPB’s new fix.