Every year, students borrow thousands of dollars each in federal student loans so they can attend college and increase their chances of upward mobility. To pay back those loans once they leave school, they need not only a decent income but also a helping hand to ensure that they understand their responsibilities and options during their years of repayment. Otherwise, student loan borrowers risk falling into default or delinquency, which can have lifetime financial repercussions.
That helping hand is supposed to come from a set of student loan servicing companies that receive millions of dollars from the federal government to work with borrowers to manage their debt and stay out of delinquency and default. These companies process payments, enroll borrowers in repayment plans, and are often the first line of contact for individual borrowers in distress.
Unfortunately, the amount of student loan debt in default across the country rose 14 percent in 2016, reaching a total balance of $137.4 billion in default. Such a sharp increase suggests real problems in the student loan servicing industry.
However, recent U.S. Department of Education action may make servicing challenges worse. On April 11, Secretary of Education Betsy DeVos rescinded several policy memos issued by the Obama administration that sought to create new requirements for servicer accountability and monitoring, as well as guaranteed rights for borrowers. These memos particularly mattered because they guided the development of a still ongoing competition to select the companies that will service all federal student loans starting in 2019. Removing these memos creates substantial uncertainty about whether borrowers will receive the protections they need and deserve.
Fortunately, the Consumer Financial Protection Bureau, or CFPB, appears poised to step up, even as the Department of Education fails to do so. The CFPB recently requested feedback on their new Student Loan Servicing Market Monitoring initiative, which would begin collecting information on federal and private student loan servicers with the goal of using those data to create better protections for consumers and borrowers.
On April 24, the Center for American Progress submitted a letter to the CFPB expressing support for the new data collection as a necessary step to identify barriers to successful loan repayment and to improve outcomes for all student loan borrowers—especially those at greatest risk of default. In particular, the letter highlights the importance of the following parts of the proposed data collection.
- Disaggregated student loan outcomes. The Department of Education currently releases quarterly data on the composition of the federal student loan portfolio, including information on the overall numbers of borrowers in different repayment plans or by loan status. But the data provide no disaggregation of results by borrower characteristics. This matters because research shows that 24 percent of borrowers who did not complete a degree defaulted within two years of entering repayment compared with only 9 percent of students who completed.
The proposed data collection would provide more detailed data on loan results by requiring servicers to report information on borrower outcomes based upon a host of characteristics. This includes separating out data for graduates, dropouts, and veterans. It would also break down results for different types of loans, such as subsidized undergraduate loans versus unsubsidized ones, as well as outcomes by repayment plan. Servicers would also provide the CFPB with the number of borrowers who are either first- or second-time defaulters.
- Private loan outcomes. While federal loans represent more than 80 percent of the more than $1.2 trillion in outstanding student loan debt, in 2015 alone, the private student loan volume stood at $7.8 billion. To date, there is minimal to no information on how these private loan borrowers fare, making it difficult to gauge the extent of that market’s problems. The CFPB collection would provide greater transparency for private loan outcomes by requiring similar types of information outlined above for these nonfederal debts.
- Barriers to income-driven repayment, or IDR, plan enrollment. More than 7 million Federal Direct Loan and Federal Family Education Loan, or FFEL, borrowers currently use an IDR plan that keeps them out of default by capping payments at a reasonable share of their income. However, more than half of borrowers on IDR struggle to complete the annual paperwork needed to stay on these plans each year. Furthermore, they face severe consequences if they miss these deadlines. Many other borrowers may never successfully apply for one of these plans in the first place, putting them at risk of default.
The proposed information collection would shed light on problems with IDR enrollment or re-enrollment by requiring servicers to report a range of new information on everyone who submitted applications to enroll in IDR or to recertify their income. The collection will measure approval time for new borrowers; recertification time for returning borrowers; and the number of incomplete or abandoned recertification applications.
- Deferments and forbearance. Under special circumstances, borrowers can receive a deferment or forbearance that allows them to temporarily stop making payments on their student loans without going into default. Today, more than 5 million Federal Direct Loan borrowers are in some type of deferment or forbearance. While deferment and forbearance are good options for borrowers who need short-term relief or are going back to school, remaining in these nonpayment statuses for lengthy periods of time can drastically increase student loan balances. In some cases, this can make the loan more difficult to pay off in the long term.
The proposed data collection would shed light on the question of whether deferments and forbearance are helping borrowers get back on their feet after taking a break from payments or are nothing more than a waypoint to default. It would require servicers to provide information on the number of borrowers in each type of deferment or forbearance, including those in a military or hardship deferment for more than 12 months. It would also detail the number of borrowers who have been in voluntary forbearance for 12 to 24 months. This information will make it possible to target reforms and recommendations that prevent borrowers from remaining in one of these nonpayment statuses for extended periods of time. The data would also help to identify borrowers in these categories early in the process; to allow the CFPB to track overall outcomes; and to inform efforts to help these borrowers get back on track to repay their loans.
- Servicer support for borrowers. While understanding borrower outcomes is important for judging servicer success, so too is knowing what servicers did or did not do to help borrowers. The proposed collection would compile data that combine borrower outcomes and consumer assistance, tracking how struggling borrowers are doing and what servicers have done to aid them. This information can help develop requirements for how often servicers should contact borrowers in different circumstances, as well as what types of outreach may be most beneficial.
Conclusion
The Obama administration aspired to create a “state-of-the-art loan servicing ecosystem” to improve the experiences and outcomes of student loan borrowers because borrowers should expect clear, consistent, and quality servicing. It is unfortunate that the Trump administration appears to be veering from that path. In the absence of a vision for servicing rules from the current Department of Education, the CFPB’s Student Loan Servicing Market Monitoring initiative is an important step toward ensuring the promise of clear and quality servicing.
Sara Garcia is a Research Associate on the Postsecondary Education team at the Center for American Progress.