The Consumer Financial Protection Bureau is taking a closer look at companies that service student loans to determine whether there are patterns of abuse and misinformation in the $1 trillion industry.
In an announcement to be released Thursday, CFPB Director Richard Cordray said the agency had been alerted to potential billing problems, lost records, delays in resolving errors and generally poor customer service at the hands of student loan service providers.
"Student debt stress can make borrowers feel like they are walking a tightrope where any false move in paying back a loan can cause them to fall," Cordray said. "Today's inquiry seeks information on the pain points in student loan servicing that make repayment a more difficult and stressful process."
The inquiry is focused on a handful of specific areas: practices that hamper repayment or make repayment more expensive; repayment options available to distressed borrowers; whether payment incentives are negatively affecting service; and the availability of information about and application of borrowers' rights and protections that are available in other loan markets.
The agency's inquiry will seek to substantiate concerns that certain servicing companies apply payments in a way that maximizes fees or increases borrowers' interest. The inquiry also notes that the industry-standard "flat fee" that servicers receive from loan originators may offer little incentive for the companies servicing the loans to be responsive and efficient or to keep borrowers out of default.
The agency also said that roughly 8 million student loan customers are in default on their debts, and the inquiry is probing whether "servicers' policies and procedures are resulting in struggling borrowers paying more fees or prolonging repayment" or whether the policies "are driving borrowers to default on their loan" in the first place.
CFPB's inquiry comes as regulators and lawmakers are increasingly concerned about the size of the nation's outstanding student loan debt. In prepared remarks for a field hearing on the subject scheduled for Thursday, Cordray said that student loans represent the largest category of consumer debt besides mortgages, with 2 out of 3 undergraduates finishing their programs in debt.
Cordray likened the growth in student loan debt to the growth in mortgage debt immediately preceding the 2008 financial crisis, and said that consumers find debt service providers' ability to meet their needs inadequate.
"As a growing share of student loan borrowers reach out to their servicers for help, the problems they encounter bear an uncanny resemblance to the situation where struggling homeowners reached out to their mortgage servicers before, during, and after the financial crisis," Cordray said. "Having seen the improper and unnecessary foreclosures experienced by many homeowners, the [CFPB] is concerned that inadequate servicing is also contributing to America's growing student loan default problem."
Federal Reserve Board Chair Janet Yellen said in a speech last November that student loan debt had grown from $260 billion in 2004 to more than $1.1 trillion 10 years later — a trend that could "make it harder for many young people to take advantage of the opportunity higher education offers."
Senator Richard Durbin, R-Ill., has introduced a bill that would amend federal bankruptcy law to allow private student loans to be discharged if a borrower cannot pay. The industry is vigorously opposed to the bill, arguing it would drive up costs and make credit more expensive.
Additionally, President Obama earlier this year directed the Department of Education to develop a "student bill of rights" that would protect students from unfair or predatory lending practices.
Banks' reaction to the inquiry was tentative. The Consumer Bankers Association, which represents many banks that originate private student loans, said that its members are committed to ensuring that customers understand their rights and protections and are interested in CFPB's results.
"CBA member banks are 100% committed to student success and are regularly working to ensure their borrowers are aware of all options available to them," CBA president Richard Hunt said in a statement. "We look forward to learning more about this initiative."