The CFPB released its fourth Annual Report of the Student Loan Ombudsman discussing complaints received by the CFPB about private and federal student loans and the lessons drawn by the Ombudsman from those complaints. (The report was issued by Seth Frotman, who is currently serving as Acting Student Loan Ombudsman after the departure of Rohit Chopra this past June.) The report is based on the CFPB Student Loan Ombudsman’s analysis of approximately 6,400 private student loan related complaints and 2,700 debt collection complaints related to private and federal student loans submitted to the CFPB from October 1, 2014 to September 30, 2015. (This continues to represent an exceedingly low complaint rate given the millions of private student loans outstanding.)
The Student Loan Ombudsman’s report comes on the heels of the report on student loan servicing issued by the CFPB at the end of last month which discussed comments submitted in response to a Request for Information Regarding Student Loan Servicing published by the CFPB in May 2015. That report was accompanied by a Joint Statement of Principles on Student Loan Servicing issued by the CFPB, U.S. Department of the Treasury, and the U.S. Department of Education, which recommended that industrywide standards be created for the entire servicing market. In the new report, the Student Loan Ombudsman cites the report’s findings as additional support for that recommendation.
Like last month’s report, the new report is heavily focused on servicers’ alleged failure to help distressed private and federal student loan borrowers enroll or stay enrolled in affordable or income-driven repayment plans. The CFPB discusses complaints from borrowers about various problems experienced in obtaining information about such plans, including information about how to recertify for income-driven plans and difficulties that result from untimely recertifications. Despite the limited number of complaints received by the CFPB, the Student Loan Ombudsman contends in the report that data from the GAO “suggest[s] the servicing problems [cited in the complaints] may be experienced by a broad segment of student loan borrowers.”
The Ombudsman also contends in the report that economic incentives for student loan servicers may contribute to limited utilization of income-driven repayment plans. The report states that “it is not clear whether third-party student loan servicers have adequate economic incentives to enroll borrowers” in such plans. In particular, the report faults compensation models under which servicers are paid a flat monthly fee per account serviced regardless of the level of service a particular borrower requires in a given month.
A substantial portion of the report is devoted to the utilization of income-driven repayment plans by borrowers with privately-held, federally-guaranteed student loans made by private lenders (FFELP loans). Although FFELP loans were discontinued in 2010, the report indicates that they comprise more than $370 billion of outstanding student loans. The CFPB’s findings on such loans are based on its analysis of a sample that included portfolio-level summary information of more than $150 billion in such loans owed by more than 7.5 million borrowers as of December 30, 2014. The CFPB notes that “[t]his is not a statistically-valid, random sample and these results should not be interpreted to suggest significance.” Nevertheless, it states that because the sample includes information about approximately 60 percent of all privately-held FFELP loans outstanding, it “may offer readers insight into common experiences for borrowers with privately-held FFELP loans serviced by large, nonbank specialty student loan servicers.”
The CFPB states that FFELP loan borrowers show “a higher level of distress than the [student loan] market as a whole.” Based on its analysis, the CFPB found that at least 30 percent of FFELP borrowers are either in default or more than 30 days past due. The CFPB contrasts this with market-wide levels indicating that 25 percent of student loan borrowers are either in default or more than 30 days past due. The CFPB found that FFELP borrowers use income-driven repayment plans at nearly one third of the rate of borrowers in the federal direct loan program. (The CFPB acknowledges that certain characteristics of FFELP loans, such as the higher portion of FFELP loans that are consolidation loans and the unavailability of the most generous income-driven repayment plan for FFELP loans, may partially explain the lower utilization rate.)
In addition to citing the report as additional support for industry-wide servicing standards, the Student Loan Ombudsman recommends that policymakers “consider additional steps to expand public access to data on student loan performance and the utilization of alternative repayment plans, including income-driven repayment plans.” He suggests that policymakers consider the establishment of a uniform set of metrics on student loan servicing performance for all types of student loans and compile and publish data reflecting such metrics to “better position policymakers and market participants to target resources to assist at-risk borrowers” and “inform future initiatives to establish industrywide [servicing] standards.” He also suggests that policymakers consider the establishment of a uniform set of industrywide metrics on alternative repayment plan utilization and performance and consider aggregating and publishing such data on a periodic basis “to facilitate comparison in performance among student loan servicers.” According to the Ombudsman, the compilation of such metrics could “provide incentive for servicers to improve performance and proactively resolve servicing issues.”
Based on its past practice, we expect the CFPB to pursue the issues raised in the report through a combination of use of its bully pulpit, lobbying efforts, industry guidance, heightened scrutiny in examinations, and enforcement actions.