For many Americans, student loans are a fact of life. Most college graduates have some level of student debt, at least some of which is held by the federal government through student loan programs like Stafford loans, Perkins loansand more. Repayment of these loans is often handled through third party companies known as loan servicers. In recent years, complaints about student loan servicing companies have risen — and the Department of Education has responded with new requirements.
These rules are designed to improve communication between borrowers and servicing companies, particularly when it comes to anyone at risk of defaulting on their loans. Compliance with these requirements will be one of the metrics that the Department of Education uses to choose student loan servicers through its new selection process, set to begin in 2017. Companies that fall short will likely be excluded from the Department’s ultimate goal of building a single surviving platform for all student loan borrowers.
Rising Complaints Prompt Shift
The new regulations arose after the Consumer Financial Protection Bureau (CFPB) reported an increasing number of complaints about companies that service federal student loans. Many borrowers had a difficult time finding out exactly what they owed and to whom they owed it, or even the number of payments that they have made.
Without this information, borrowers cannot set a plan for repayment, budget for student loan payments or figure out if their loan numbers are accurate.
This is particularly problematic when it comes to borrowers at risk of defaulting on their student loans. Obtaining information on income-driven repayment plans and other options to avoid default is critical to borrowers’ ability to stay current on their student loans. The CFPB has reported significant problems with the student loan servicing process, including breakdowns in communication and illegal servicing practices that harm borrowers.
With this in mind, the Department of Education announced these new rules that are designed to address these issues and ensure that borrowers can obtain accurate, timely information about their loans and their options for repaying their federal student loans.
According to Student Loan Ombudsman Seth Frotman, grads with federal student loan debt should not be driven into default when there are many income-based repayment plans that may help them avoid this drastic measure that can have a serious impact on their credit score and overall financial health. The Department of Education also noted that it is considering other protections for student loan borrowers, similar to those for the mortgage and credit card industries.
New Rules Will Impact Loan Servicing Company Selection
The new requirements will also be an important method for the Department of Education to select student loan servicing companies in the future. The Department intends to enact a single student loan borrowing platform to make it simpler and more efficient to monitor loans. By enacting these new rules, the Department hopes to encourage companies to provide better service and communication.
These standards will be used as a metric for determining which student loan servicing companies are best meeting the needs of borrowers. Companies that comply with these rules will be more likely to be awarded a contract in 2017. More positive outcomes, such as fewer borrowers in default and more borrowers making on-time payments, can be used to measure companies’ progress. Improved communication is just one aspect of how these goals can be reached.
Currently, many borrowers cannot get clear, accurate information from their loan servicing companies about how much they owe and who they owe it to, or information on how much they have paid. Many borrowers have both private and federal loans; for this reason, basic statements not disclose how their loans are distributed and who they are actually paying when they submit a check each month. Knowing these figures is particularly important if a borrower is eligible for income-based repayment plans; it can help them avoid making unnecessary payments that may affect their ability to meet other financial obligations.
However, simply having access to this information may not be enough for some borrowers. Many may not understand complex loan terms or the variety of options available to them if they are having difficulty making payments on their debt. Being able to ask questions about the loans and getting clear answers may make the difference between a borrower making on-time payments and becoming delinquent or even going into default. Helping student loan borrowers avoid default should be a priority for all parties involved.
From the loan servicing company’s point of view, increased communication — particularly through mobile devices — should be beneficial to help ensure that borrowers make payments and that delinquent accounts can be made current. With access to cell phone numbers and email addresses instead of just physical addresses, student loan servicing companies can ensure that their communications reach borrowers.
While it remains to be seen how these new regulations will play out, they appear to be a positive step forward in ensuring that student loan borrowers have accurate information about their loans and their repayment options, and that they are able to remain current on their loans.
Author: Andrew Rombach
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