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Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Student loan fiasco continues

After a 42 month hiatus, student loan payments have finally resumed, and guess what? It’s a mess.

A report from the Consumer Financial Protection Bureau highlights a host of errors and service issues on the part of loan servicing companies that complicates an already inefficient federal program and impacts millions of borrowers straining to navigate the new landscape.

During the pandemic, President Trump temporarily deferred student loan payments and waived accrued interest. The forbearance was extended by President Biden and finally terminated by Congressional legislation this year, with payments to resume in October. Thanks to a rework by the US Department of Education, the hibernation period counts toward forgiveness requirements under various repayment programs, while a new income-based program known as the Saving on a Valuable Education Plan (SAVE) reduces the minimum monthly payment and waives some interest for many borrowers.

Yet despite advance warning, the resumption has been anything but orderly. Nearly 24 million borrowers previously in deferral have a new servicing company as millions more begin payments for the first time. It is the latest episode in the well-intentioned but tragicomic tale of federal financial aid.

The current college lending program is a $1.7 trillion Frankenstein’s monster that evolved over nearly 6 decades. Today, federal loans are made directly by the US Government and are serviced by private contractors, many of whom were once direct lenders themselves. The servicing industry has been rife with fraud and abuse, prompting multiple reorganizations, most recently in 2022. Currently there are 5 contractors responsible for collecting payments and coaching borrowers on options for affordable repayment. There is plenty of blame to go around for the snafus, including Congress’ refusal to provide adequate funding after restarting payments. But it is also true that servicers laid off workers earlier this year despite the foreseeable workload once the moratorium on repayment ended.

According to the CFPB analysis of October data, call wait times have ballooned since August to an average of 73 minutes. While the queues varied by servicer, holds were so long that nearly half of all callers waived the white flag and hung up.

The CFPB also found surging backlogs of unprocessed applications for income-driven repayment plans. Servicers are required to assist borrowers in identifying and enrolling in these plans, but as of the end of October, 450,000 applications has been in process for over 30 days, potentially leading to late or incorrect payments. “Across all servicers, each employee tasked with processing income-driven repayment applications had on average 1,335 outstanding applications” the report stated.

Borrowers also received inaccurate or untimely billing statements from loan servicers showing incorrect due dates, inflated payment amounts, or erroneous calculations of income-limited payments. One servicer failed entirely to send billing statements to 2.5 million borrowers.

In response, the CFPB has penalized 3 deficient servicers by withholding fees, including a $2 million penalty to Aidvantage, the second-largest contractor. This comes on the heels of a $7 million penalty assessed in October against another servicer, MOHELA, for sending late statements.

The last thing borrowers need is additional complication in commencing or beginning repayment. While one might have expected the respite to provide an opportunity to reduce other debt, just the opposite has occurred. A June analysis from the CFPB found that 2.5 million people returning to payments this year are already delinquent on at least 1 additional obligation, and that the median scheduled payments on other debt increased by 25% since the onset of forbearance. It’s even worse for younger debtors: median non-student debt payments for 18–29-year-olds jumped by 250% since 2020.

Meanwhile, the Education Department reported that around 40% of borrowers with payments due in October had not yet made their first payment by mid-November. The restart of payments carries a 1-year grace period for principal payments, but unlike during the Covid pause, interest continues to accrue and after next September late payments will be reported to credit agencies.

While some marginal adjustments and limited forgiveness based on specific circumstances have been implemented, the broader effort to absolve large swathes of borrowers has mercifully run its course. To be sure, the entire system including the role of private servicers is badly in need of reform, but it is now time for beneficiaries of the program to get on with the business of repayment.

It is also time for borrowers whose college degree was subsidized by taxpayers to ease off on the whinging. The average loan balance for recent graduates with a bachelor’s degree is $30,000, a relatively modest investment compared with the additional $800,000 in additional lifetime earnings they can expect on average compared with just a high school diploma. And while 7% of borrowers carry loan balances over $100,000, most of that debt is for graduate degrees with average lifetime earnings premiums over $1 million. It is true that the system allowed too many students to overborrow relative to future earning power for certain degree programs, but the newer income-based repayment plans address this dilemma while victims of predatory lenders or fraudulent institutions are currently receiving relief.

Struggling borrowers who intend to repay their obligations hardly need additional roadblocks thrown up by servicing companies. If you have gotten caught up in the grinder or have a complaint about a loan servicing company, you can file a complaint with the CFPB at cfpb.gov/complaint, or call (855)-411-CFPB. And hang in there.

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