Student loan borrowers are in serious need of better communication with loan servicers and clearer information about their servicing options, regulators were told Thursday.
On the same day the Consumer Financial Protection Bureau announced a "public inquiry" into student loan servicing practices, the agency held a field hearing in Milwaukee to hear insights from various stakeholders — including servicing industry representatives and borrower advocates — on how to improve servicing choices and reduce loan default rates.
But the hearing was also a chance for an Obama administration official to lay out goals for reforming the student loan market. Ted Mitchell, the undersecretary for the Department of Education, said the department is in the process of reviewing contracts with servicers of federal student loans. He said the review includes an examination of the student lending experience "front to back," with the goal being essentially to end all defaults.
"With the tools we have in place, particularly income-driven repayment plans, we should all be aiming at a zero default rate among student loan borrowers," Mitchell said. "We need to be sure that the servicers' incentives align with the goal of zero default, and we need to be sure to set high and definitive performance standards and then hold our servicers to those standards."
As part of its inquiry, the CFPB plans to investigate whether student loan servicers need greater federal oversight. The probe stems from concerns about firms unfairly structuring repayments in ways that increase fees or actually spurring defaults through poor communication and service.
In March, the White House also issued a "student bill of rights" aimed at improving the servicing of student loan debt. Policymakers' concerns come against the backdrop of the massive amount of student loan debt in the country. Federal Reserve Chair Janet Yellen said late last year that the $1.1 trillion in outstanding loan debt is a source of increasing concern for long-term growth and financial stability.
But many in the industry say any review of student lending should also include a look at restrictions placed on servicers in their ability to contact and communicate repayment options with borrowers.
Timothy Fitzgibbon, senior vice president of servicing industry at the National Council of Higher Education Resources, a trade group, said rules implementing the 1991 Telephone Consumer Protection Act prohibit servicers from reaching borrowers on their mobile devices. That makes it virtually impossible to reach most borrowers, Fitzgibbon said, and inform them about repayment options that in some cases could prevent a default.
"What we believe borrowers need centers on providing personal communication, personal conversations — not websites, not collection letters, real person-to-person conversations," Fitzgibbon said. "We have to overcome unnecessary technical barriers that are blocking these conversations between the borrower and the service provider."
Dick George, president of the Great Lakes Higher Education Corp., a major Midwestern student loan servicing firm, said that almost all of the outreach tools available to servicers come at or around the borrower's graduation date. But the majority of the borrowers who find themselves in default are college dropouts, and the relief that is most needed should be directed at them.
"There's a great deal of concern with providing relief for overburdened graduates, and in our view the focus really needs to be on a different cohort of borrowers," George said. "It is the cohort not that has graduated and borrowed too much, but a cohort who has borrowed too little because they fail at postsecondary education."
George estimated that dropouts make up between 80 and 85% of his company's delinquency and default portfolio. He said students that leave college early also have a tendency to change addresses and telephone numbers without leaving forwarding information. Servicers often refer to those borrowers as "skips." Once they have reached that status, he said, there is little that servicers or lenders can do to rehabilitate the loan.
"All of the tools and instruments that we have — deferment, forbearance, alternative repayment methodologies, loan forgiveness — all of those things that we could normally bring to bear to cure any delinquency and default" are unavailable when a borrower becomes a "skip," George said. "We can't do that if we can't communicate with that vulnerable cohort of dropouts."
Other groups called for more measured changes. Justin Draeger, president of the National Association of Student Financial Aid Administrators, said that one of the biggest challenges for administrators is being able to understand the differences between servicers. Developing a single manual that details how servicers and their repayment options compare would go a long way to helping students make smart choices, he said.
Advocates for students and student loan borrowers see the problem differently. Jennifer Wang, policy director for the advocacy group Young Invincibles, said the opacity of the market means borrowers may not only be unaware of which company services their loans but also whether a servicer is a good or bad actor. The CFPB or other agencies should develop and enforce a set of standard practices that all servicers have to adhere to, Wang said.
"There has to be better consumer information out there about performance," Wang said. "Competition between the servicers is a good thing, but I think there are better incentives out there."
Deanne Loonin, head of student loan assistance at the National Consumer Law Center, said borrowers should more easily be able to switch from one servicer to another. She added that making it easier for servicers to reach borrowers is of no value if the servicers are not relaying accurate or useful information about the borrowers' options. Servicers should have a specialized unit that is dedicated to laying out repayment options, Loonin said.
"It's not in my view about contact. I hear inaccurate information being given to [my clients] all the time," Loonin said. "At least get some specialized unit so that really vulnerable people can get accurate information."