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October 16, 2012

REPORT: PRIVATE STUDENT LOAN BORROWERS FACE ROADBLOCKS TO REPAYMENT

Complaints of Surprises, Runarounds, and Dead-Ends Similar to Problems Found in Mortgage Servicing

The Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman released a report today on private 

student loan complaints that describes how some borrowers may be struggling to pay back their debt because 

of difficulties with their loan servicers. The report finds some similarities with complaints heard about the 

mortgage servicing business. The issues detailed in the report, “The CFPB Student Loan Ombudsman’s Annual 

Report,” are based on input received from borrowers through complaints, comments, and other submissions. 

Many former students say they are sometimes surprised by the terms and conditions of their loans, some are 

given the runaround by their loan servicer, and others have few options for refinancing a better deal.

BACKGROUND

• Outstanding student loan debt is now more than $1 trillion. Student loans have surpassed credit cards as the 

largest source of outstanding consumer debt, outside of mortgages. Forty percent of American households 

headed by someone under 35 have student loan debt, according to the Survey of Consumer Finance. Private 

student loans account for more than $150 billion of the outstanding debt and more than 850,000 of these 

loans are in default, with even more in delinquency.

• Most private student loans do not have the same borrower protections of federal loans, such as incomebased repayment plans, discharges upon death, or military deferments. Like mortgage borrowers, private 

student loan borrowers make their payments and inquiries to loan servicers, which are often different than 

the lender itself. And, like mortgages, the servicer’s customer is generally the lender. They may not have the 

incentive to provide a high level of customer service to the borrower.

• Since March 2012, the CFPB has received approximately 2,900 complaints on private student loans. With 95

percent of the complaints about servicing, today’s report notes a strong resemblance to mortgage servicing. 

A breakdown of the complaints:

o 65 percent relate to servicing, including complaints about fees, billing, deferment, forbearance, 

fraud, and credit reporting. 

o 30 percent are about problems consumers face when they are unable to pay, including complaints 

about default, debt collection, and bankruptcy practices.

o 5 percent concern getting a loan, including problems with origination, marketing, and borrower 

confusion about loan terms and conditions. 

SURPRISES

Some private student loan borrowers told the CFPB that after they leave school, they have a hard time figuring

out how much they owe. Borrowers report they often do not receive the information they need about their 

loans, and may be caught off guard by unexpected terms and costs. Even those who receive disclosures may not 

remember what they were told three or four years before repayment begins. Unable to anticipate and avoid

these surprises, some borrowers end up in trouble.

• Unknown or misunderstood terms and conditions: Borrowers complain of not being fully informed of 

the conditions of their loans. Some say they were never advised of the difference between a federal and 
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private student loan. This issue has come up for borrowers at both the origination and repayment stages

of their loans. 

• Accounts changing hands: Some student loan borrowers find that their loans have been sold or their 

servicer has changed. Borrowers report that sometimes servicers cannot even answer who owns a loan.

• Unauthorized payments: Some borrowers have deposit accounts with the same financial institution that 

handles their private student loan. Borrowers report that in some circumstances, if the borrower has not 

paid his or her student loan on time, the lender might automatically deduct funds from the borrower’s 

checking account, sometimes also charging an overdraft fee if the account is overdrawn.

• Unexpected forbearance fees: Borrowers state that some lenders and servicers charge a fee for 

forbearance even though borrowers requesting forbearance typically cannot afford to make their 

payments – being charged additional fees is not the help they are seeking. Correspondingly, a monthly 

charge of forbearance fees forces borrowers to come up with money as they attempt to demonstrate 

that they are experiencing financial hardship.

RUNAROUNDS

Private student loan borrowers complained of running into hurdles in trying to pay back their loans. Often the 

problems reported are simple and basic. And they complained that servicing personnel may not be adequately 

trained to provide assistance or may be unaware of resources available to borrowers. Like mortgage servicing,

when these problems arise, private student loan borrowers can end up in trouble because of servicer error or 

misinformation.

• Payments credited late or unevenly: According to borrowers, some servicers may take several days to 

process payments and borrowers end up paying interest on the outstanding principal during that 

processing time. Payments may also be applied to an account well after the funds are debited from a 

borrower’s bank account. And some servicers may take two to four days to process payments submitted 

online, when other financial services companies are able to credit such payments almost instantly.

• Faulty record-keeping: Borrowers report that paperwork may get lost and errors aren’t always fixed 

quickly. And some borrowers complain about limited access to their account information, including their 

payment history. Other borrowers report having difficulty understanding how their payments have been 

applied to interest and principal.

• Inadequate assistance from servicing staff: Borrowers report getting transferred to multiple 

departments, none of which may be responsive or empowered to provide a clear answer. Borrowers 

also complain about being unable to reach appropriate service staff members to correct a mistake in 

how a payment was applied to their account. Other borrowers complain about conflicting instructions 

from different employees of the same servicer.

DEAD-ENDS

Private student loans have few repayment options. And when they do, they typically offer very limited deferrals

and forbearance, and no interest rate changes. Even for borrowers not in distress, being locked in can be costly 

because as borrowers build a credit profile, graduate, and earn income, they may be unable to refinance existing 

student debt to a lower rate.

• Few modification and refinance options: By far, the most common concern communicated by 

borrowers is the difficulty they have negotiating a repayment plan with their servicer in periods of 

unemployment, underemployment, or financial hardship. Many borrowers report frustration that they 

are able to manage their payments on their federal student loans through programs like Income-Based 

Repayment, but are unable to identify appropriate personnel who can make a determination about a 

more “workable” repayment plan until they can get back on their feet. It may be hard simply to get the 

straight answer that the lender has no such program. 
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• “Good faith” partial payments still lead to default: Some borrowers expressed frustration that servicer 

personnel encouraged them to pay what they could afford without informing them that they would still 

be on a path toward default.

• Difficulty taking advantage of promised incentives: It is common for lenders to offer various incentives 

to borrowers in marketing materials prior to origination. These might include interest rate or principal 

reductions for engaging in activities that increase the likelihood of repayment, such as graduation or 

enrollment in an auto-debit program. But some borrowers complain that servicers put hurdles between 

them and these incentives, making it hard for consumers to take advantage of them.

• Barriers to co-signer release: Some private student loan originators describe that co-signers can be 

released from responsibility after a period of consecutive on-time payments. However, this release is 

not automatic. Some borrowers describe that it is difficult to activate this option.