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Research of the Week: Why are Student Loans So Problematic?

Complaints reveal that loan servicers don’t do enough to inform borrowers.

Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…

The interesting study

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB was tasked to analyze student loan complaints it received each year. They just released this year’s report,  covering complaints received between September 1 of last year and August 31 of this year.

The big result

When it comes to other types of debt, the leading complaint that the CFPB receives always relates to debt collection. For instance, when people complain to the CFPB about credit cards, it’s usually because they face harassment by a collector.

For student loans however, debt collection complaints are a drop in the bucket. Of the 22,900 complaints that the CFPB received for student loans, only 10% (2,300) related to debt collections. The other 90% were complaints about the loan servicer.

Problems with student loans weight especially hard on Millennials

The fascinating details

This year, the CFPB received 12,900 complaints about federal loan servicers and 7,770 for private servicers. These are basically complaints that stem from loan servicers making it tough for borrowers to understand loan repayment. Borrowers say they don’t have proper information about how to make payments and, more importantly, how to qualify for relief.

Of the federal student loan complaints received this year:

  • 71% related to problems dealing with the loan servicers
  • 28% struggled to repay their loans
  • 2% dealt with credit score or credit report issues

The majority of the complaints (61%) originated from one company – Navient. That’s troubling, considering that earlier this year, the Department of Education announced plans to reduce federal loan servicing to one company. The company they named? Navient.

For private student loans:

  • 61% of complaints revolved directly around the servicer
  • 35% involved struggles to repay the loan
  • 3% reported problems getting a loan
  • 1% had credit problems

Again, 61% of all private loan complaints received were for Navient. Even in debt collection, that name comes up again – 66% of collection complaints came from them.

The report goes on to reveal how even when the complaint is not about the servicer, it often is. For example, the second top complaint for federal and private loans stemmed from people not being able to make their payments. But a report from the Government Accountability Office a few years ago found this often stemmed from lack of information. Servicers failed to inform borrowers about federal relief programs. So, even when the complaints aren’t about servicers, they often stem from servicer communication.

What you can do

“You can’t rely on student loan servicers to give you timely and effective information,” explains Consolidated Credit’s President Gary Herman. “If you have student loans to repay, it’s up to you to stay on top of your payments. It’s also up to you to proactively seek information about student loan relief options if you run into trouble.”

Federal regulations state that federal student loan servicers must supply information about repayment plans and forgiveness options. However, servicers tend to be bad at distributing this information readily without being asked for it.

There are seven different federal repayment plans that can make it easier to pay off your loans. Two plans focus on getting you out of debt quickly to minimize interest charges. However, this generally means higher monthly payments. On the other hand, five programs focus on reducing your monthly payments; these are known as income-driven repayment (IDR) programs.

All IDR programs tie your monthly payment requirement to your income and family size. It’s basically the federal government’s way of acknowledging that a low income or bigger family make loan repayment harder. The programs generally match your monthly payments to between 10% to 20% of your take-home income. With two of the programs, if you fall below the Federal Poverty Line for your state, you may pay nothing. That continues until your financial situation improves. There are also loan forgiveness programs that forgive part of your loans without penalties.

“If you’re confused or intimated by the number of options you have for student loan relief, talk to an expert,” Herman encourages. “Just like a credit counselor can help you find solutions for credit card debt, there are student loan resolution specialists. They can help you navigate these programs and complete the paperwork, which is often complex and exhaustive.”

For more information on student loan repayment plans, visit Consolidated Credit’s Student Loan Consolidation Guide.

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