Report: Student Loan Servicers Hinder Income Driven Repayment Plan Adoptions
Posted By Donna Fuscaldo on September 2, 2016 at 9:36 am
Income driven repayment plans were supposed to rescue countless student loan borrowers saddled with federal student debt. After all, they only have to pay what they can afford. But it turns out these plans may not be all they are chalked up to be. The blame, according to the Consumer Financial Protection Bureau, falls squarely on the loan servicers.
“Many borrowers depend on student loan servicers to inform them about the availability of IDR (income driven repayment) options and for processing borrowers’ enrollment in these plans,” said Seth Frotman, CFPB’s student loan ombudsman and assistant director for the Office for Students and Young Consumers in the agency’s midyear update on student loan complaints report. “Borrowers encounter obstacles when submitting applications for IDR plans, including poor customer service, unexpected delays, lost paperwork, and inconsistent or inaccurate application processing. Consumer complaints describe how these obstacles can increase costs, reduce benefits, and extend repayment terms for consumers.”
White House wants the process streamlined
Nearly a year-and-a-half ago the White House announced a series of initiatives designed to do more to help borrowers struggling to repay student loan debt, which at last count was hovering around $1.3 trillion. Dubbed the Student Aid Bill of Rights, it includes an overhaul of income driven repayment plans, capping federal loan payments at 10 percent of a borrower’s income and making it available to all direct loan borrowers.
What’s more, the Department of Education said it would streamline the approval process for income driven repayment plans and increase outreach to get the word out. All of the initiatives are well-intentioned, but many loan servicers reportedly aren’t holding up their end of the bargain, making what is supposed to be a viable way to tackle student loan debt harmful for some.
“Income driven repayment plans have done a lot to help borrowers struggling with education debt,” says Betsy Mayotte, director of consumer outreach and compliance at American Student Assistance. “The problem is, depending on how you look at it, there are six or seven plans that are almost the same.”
Loan servicers dropping the ball on income driven repayment
According to the CFPB, servicing problems happen at every stage of the income driven repayment lifecycle, starting with the application and ending with the payments. The CFPB says it handled multiple complaints from October 2015 to May 2016 from borrowers who described the application process as riddled with delays that lasted weeks or months.
During those extended periods, borrowers lost out on other protections the CFPB says could have lowered their monthly payment, saved money on interest and hastened their path to getting out from under the debt. “Many student loan borrowers are able to complete the application process for an IDR plan online at www.studentloans.gov, supplemented by tax information provided electronically by the Internal Revenue Service,” said Frotman in the report. “For these borrowers, a student loan servicer need only validate the information provided, and approve or deny the application. However, consumers seeking to apply online in this manner report encountering costly and cumbersome delays.”
The CFPB also said it received complaints from eligible borrowers’ whose applications were rejected without having an opportunity to correct mistakes or update documents they provided. What’s more, the bureau fielded complaints from borrowers who were steered into short-term alternatives such as forbearance even though an income driven repayment program would have been better suited for them. “When borrowers apply to enroll in IDR, processing delays can increase the short-term and long-term cost of repayment,” Frotman said.
Navient blames the government
Among student loan servicers that were the subjects of complains to the CFPB. Navient was by far the leader with more than 1,100. ES/PHEAA came in second with 317 complaints, and Sallie Mae was third with 161 complaints during the period considered. At the same time the CFPB is taking servicers to task for their practices, Navient Chief Executive Jack Remondi points to the government, which handles about 90 percent of student loans.
“While these plans are a life raft for many, the staggering number of options — 56 in total — complex terms and cumbersome application and renewal processes leave many others adrift,” Remondi said in a Washington Post op-ed. “Take the nine income-driven repayment options. Some count a spouse’s income in the formula, some don’t. Some last for 20 years, and some for 25 … Compounding the confusion, the programs have sound-alike names, such as Income-Based Repayment, Income-Sensitive Repayment, Income-Contingent Repayment, Pay As You Earn and Revised Pay As You Earn.”
Remondi says the process to apply, which requires borrowers to go to a Department of Education website to complete a lengthy application, select a program from a slew of similar-sounding options and provide proof of income further complicates the process. He says it may be why the company found in an analysis of Navient serviced borrowers, just 28 percent of past-due-prequalified applicants complete the necessary steps to enroll in an income driven repayment plan. “In the modern economy, technology enables millennials to hail a car, order groceries, or access volumes of information conveniently and instantly. The process of signing up for IDR should be just as simple,” he said.