Academic journal article Journal of Corporation Law

Student Loan Servicing Standards: Should the Government Look to Other Markets to Better Protect Student Borrowers?

Academic journal article Journal of Corporation Law

Student Loan Servicing Standards: Should the Government Look to Other Markets to Better Protect Student Borrowers?

Article excerpt

I.   INTRODUCTION II.  BACKGROUND      A. Student Loan Servicing      B. Common Problems with Servicers         1. Repayment Options         2. Choice of Servicer         3. Forbearance         4. Servicer Transfers         5. Customer Service      C. Current Enforcement and Relief III. ANALYSIS      A. RESPA and Potential Regulation from the Real Estate Market         1. Nipping Problematic Loans in the Bud         2. Dealing with Transfer Problems      B. Looking to the Credit Card Market IV.  RECOMMENDATION      A. Lessons from the Mortgage Market      B. Applicability of the Credit Card Market to the Student Loan         Servicing Marketplace      C. Aligning Incentives      D. Implementation V.   CONCLUSION 

I. INTRODUCTION

Student loan debt is quickly becoming a problem of great national concern. More than 40 million borrowers owe a collective $1.2 trillion in outstanding debt. (1) Student loan debt is now the second largest consumer debt market in the United States. (2) College graduates saddled with high amounts of debt are putting off major life decisions while they struggle to pay it off. (3) Homeownership by Americans under the age of 35 has gone from 43.3% in the first quarter of 2005 to 34.6% in the first quarter of 2015. (4) The median age for a first birth, rising steadily in the past decade, is now at 26, and the birth rate among women 20 to 29 is at an all-time high. (5) Many students with debt are also feeling the pressure to enter high paying jobs while passing up opportunities in the public interest sector. (6) Recent graduates may also feel pressure to forgo starting their own businesses or working for a start-up company in favor of a safer opportunity elsewhere. (7) Because the government owns or guarantees a large portion of student debt, there is not as high a chance of systematic risk to the economy, but the possibility that the high amount of debt will create economic drag is very real. (8) It seems clear that the student loan crisis shows no signs of being averted anytime soon.

This Note will focus on one specific component of the student loan debt market: student loan servicers. Student loan servicers are the crucial link between the borrower and the lender. Servicers are the ones who manage borrower accounts, process payments, and speak directly with the borrower. (9) Borrowers must turn to their servicers if they are having trouble making payments on their loans. (10) It is easy to see why servicers are a crucial part of the student loan debt market. Unfortunately, many students experience great frustration with their servicers. Worse, some borrowers are not aware of who their servicer is or to what repayment options they might be entitled. (11) These types of problems can lead to missed payments and even default, exacerbating the student loan crisis described above.

In Part II, this Note will detail the many frustrations student borrowers have when dealing with student loan servicers. Part III of this Note will compare the student loan debt market to the mortgage and credit card markets. Both of those markets have pre-existing regulations on servicers. Lastly, in Part IV, this Note will recommend that some of the regulations from the credit card and mortgage market can be successfully adopted in the student loan market.

II. BACKGROUND

There are about 41 million Americans who owe student loan debt. (12) The student loan market is primarily made up of three types of loans. The first type is federally backed loans made by private lenders through the Federal Family Education Loan Program (FFELP). (13) This program was discontinued in 2010, but there remains over $350 billion still owed from these types of loans. (14) The second category of loans, replacing the FFELP, are loans distributed by the Department of Education's Direct Loan Program. (15) The most common type of loan within this category is the Stafford loan. There are subsidized and unsubsidized Stafford loans. …

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