Report: Student loan servicers mishandle paperwork, discourage alternative payment plans

WASHINGTON, Sept. 29 (UPI) -- Student-loan servicing companies mishandle paperwork, tack on "surprise" fees and actively work to discourage borrowers from trying alternative repayment plans, in some cases causing default, federal regulators said Tuesday.

The Consumer Financial Protection Bureau found "widespread servicing failures" across the board by both private and federal student-loan servicers and urged new rules to protect borrowers. A report by the bureau found "a wide range of sloppy, patchwork practices that can create obstacles to repayment, raise costs, cause distress and contribute to driving struggling borrowers to default."

"With one out of four student loan borrowers struggling to repay their loans or already in default, cleaning up the servicing market is critical," CFPB Director Richard Cordray said. "Today's report underscores the need for market-wide student loan servicing reforms to halt harmful practices and boost assistance for distressed borrowers."

Student loans are the second-largest class of U.S. consumer debt behind mortgages. Since 2006, student debt has more than doubled from less than $600 billion to more than $1.2 trillion currently, the bureau said. Student loan servicers provide a link between borrowers and lenders. They manage borrowers' accounts, process monthly payments, arrange and manage enrollment in alternative repayment plans, and communicate directly with borrowers.

"There are no consistent, market-wide federal standards for student loan servicing, and servicers generally have discretion to determine policies related to many aspects of servicing operations," the bureau said.

The report, based on more than 30,000 comments the watchdog group received as part of its stepped-up oversight of servicers, found some 10 million borrowers had their servicers change in the past five years, which resulted in lost payments and late fees.

Military borrowers also face difficulties obtaining the Servicemembers Civil Relief Act interest rate cap of six percent. Some reported they have to make multiple calls to ensure the servicer will apply the appropriate interest rate.

"These military borrowers emphasize their need to be mission-focused and free of distractions when faced with impending deployments," the report said.

Older borrowers as well face difficulties, running the risk of social security check garnishment if their loans go into default.

"I will be 66 years old this year and I owe $55,104 in student loans. I am retired and living on social security and a pension. My income will not increase and yet I have not been able to change my chosen payment plan," one borrower said. "I made that request again today for another year and pray that it will be approved."

Also Tuesday, the bureau, in conjunction with the departments of Education and Treasury, issued a "Joint Statement of Principles on Student Loan Servicing" to build "framework to improve student loan servicing practices, promote borrower success and minimize defaults." The statement, required under President Obama's Student Aid Bill of Rights, ensures servicing is consistent, accurate and actionable, accountable and transparent.