CFPB: Distressed Private Student Loan Borrowers Are Unaware of Options

Many private student loan borrowers are being driven into default due to a lack of information and affordable loan modification options, according to the Annual Report of the Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman released on Thursday.

The report analyzed more than 5,300 private student loan complaints received during a one-year period from October 1, 2013, to September 30, 2014, a jump of 38 percent from the previous year. Many of the borrowers who filed complaints say they are committed to repaying their loans if they could be restructured to meet current financial circumstances, but they are finding there are no viable modification options, thus driving the borrowers into default.

"We are hearing from consumers that they are driven into default because private student loan companies are not providing concrete loan modification options," CFPB Director Richard Cordray said. "Struggling private student loan borrowers are finding themselves out of luck and out of options. Lenders and servicers must redouble their efforts to deal with these distressed borrowers."

U.S. Department of Treasury Deputy Secretary Sarah Bloom Raskin said in late September that she did not believe student loan debt was "inherently bad" because of its return on investment; however, when a student loan goes into default, the damage done to the borrower's credit score could have a lingering effect that takes years to resolve. When a borrower defaults on a student loan, the whole balance of the loan becomes due immediately, which in turn damages the borrower's credit score and could not only hurt the borrower's chances of passing a background check when applying for a job, but could also prevent that borrower from obtaining a loan for housing.

Analysis of the complaints revealed that private student loan borrowers:

• Were unaware of the options available to them as far as loan modifications that would help them avoid defaulting. Complainants reported that information regarding loan modifications was not readily available on the lender's website, and many borrowers say they were given conflicting or inaccurate information when they were referred to different customer service representatives.
• Reported there were no affordable loan modification options available. While federal student loan borrowers are eligible for a range of loan modification options such as extended loan terms or income-based payment plans to help them avoid defaulting, private student loan borrowers are not eligible for those same options.
• Claim that fixes are temporary. Many servicers do not offer repayment plans, but instead offer private student loan borrowers temporary forbearance that gives the borrower a period of time, usually a few months, where no payment is due. The complainants said this only delays the inevitable, since enrollment fees and processing delays eventually lead to default anyway.

According to CFPB, more than 7 million Americans are currently in default on student loans, totaling more than $1.2 trillion in outstanding loan debt.

"The response by the private student loan industry to distressed borrowers is failing to help them avoid default," said CFPB Student Loan Ombudsman Rohit Chopra, who submitted the report. "Too many borrowers are barely treading water, losing hope that these companies will throw them a lifeline."

CFPB is currently offering that lifeline in the form of online tools to help private student loan borrowers who are at risk of default. One is a letter that borrowers can edit and send to their servicers requesting lower payments or information on loan modification programs. Another is a sample financial worksheet that helps borrowers determine the maximum funds available to repay their loans.

Another tool available to distressed borrowers is CFPB's Repay Student Debt tool, an interactive resource that allows borrowers facing default to navigate through their options step by step.