Academic journal article AEI Paper & Studies


Academic journal article AEI Paper & Studies


Article excerpt

Americans are anxious about rapidly rising levels of student debt. They wonder whether payments are affordable and if financing college with debt will pay off in the end. But recent news headlines suggest another issue is increasingly on borrowers' minds: bad customer service and shoddy advice during loan repayment. This can leave borrowers feeling confused and cheated and can even lead them to incur additional costs.

The view that this is a widespread problem has prompted several states to enact laws aimed at loan servicing. (1) Similarly, several lawsuits that allege borrowers were cheated by bad loan servicing are working their way through the courts. (2) Some in Congress have even called for a national "student loan bill of rights" to guard against bad loan servicing. (3)

Nearly all student debt is issued through the federal government's student loan program, though the government does not actually service the loans itself. Instead, it hires private contractors ("servicers") to handle most interactions with borrowers. In fact, borrowers with federal student loans interact with the US Department of Education only under a limited set of circumstances when repaying their loans, such as by submitting applications and other forms on the department's website. Servicers process payments, staff call centers, maintain websites, send account statements, and inform borrowers of repayment options. Concerns over the quality and reliability of loan servicing are thus generally directed at the private contractors that collect the loans on the government's behalf, rather than at Congress or the department, which set the repayment terms for borrowers.

There is, however, a risk in automatically blaming servicers when borrowers believe they were mistreated. The alleged mistreatment may actually lie with the design of the loan program itself, not in how loans are serviced. In such cases, Congress and the department are responsible for the problem--and the solution.

In this report we measure the extent to which concerns and complaints about servicing in the federal student loan program could instead be misidentified complaints about the program's design. We analyzed a random sample of 1,200 out of 12,113 complaints borrowers have submitted to the Consumer Financial Protection Bureau's (CFPB) database that were classified as complaints against federal student loan servicers. (4) We did not attempt to verify the complaints or determine whether borrowers' descriptions of events were accurate. Instead, we aimed only to assess the central topic about which a borrower complained.

We found that 44 percent of complaints referenced something under loan servicers' control. In other words, fewer than half of the complaints filed under student loan servicing are about student loan servicing. Thirty-five percent of the complaints were about the terms and rules of the federal loan program, which servicers do not set. Another 12 percent of the complaints were not related to servicing or the terms of the loan but were complaints about institutions of higher education, debt relief companies, or some other matter. The remaining 9 percent contained so little information (or were so garbled) that we could not categorize them. (5)

Background on Federal Student Loans and Servicing

The federal student loan program dates back to the 1960s. In recent years this program has grown rapidly, with nearly $1.5 trillion in debt held by almost 43 million Americans. (6) That is nearly the same number of people currently receiving retirement benefits through the Social Security program. (7) For much of the program's history, private lenders made Federal Family Education Loans (FFEL) to borrowers, while the government set interest rates, determined repayment options, and insured lenders against losses.

Since 2010, however, the federal government has made and held all federal loans through the Direct Loan (DL) program, which has existed since the 1990s. …

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