The federal consumer bureau on Monday launched an industry-wide investigation to determine why borrowers with federal student loans are being kicked out of generous programs that keep their payments affordable.
Virtually all borrowers with federal student loans are eligible to make monthly payments based on their incomes if their earnings are low relative to their student debt burdens. President Barack Obama on at least three occasions -- most recently in March -- has publicly bemoaned the relatively low number of borrowers enrolled in so-called income-driven repayment plans.
Enrolling distressed borrowers into federal plans that limit their monthly payments to a percentage of their take-home pay has become an Obama administration priority as federal student debt climbs toward $1.2 trillion, millions of borrowers are either in delinquency or in default, and policymakers and bankers worry that unaffordable payments risk slowing economic growth. President Barack Obama at least twice has publicly ordered Education Secretary Arne Duncan to make it easier for borrowers to get into plans such as Income Based Repayment and Pay As You Earn.
But as millions of borrowers struggling to make payments take advantage of income-driven plans -- enrollment among borrowers with Direct Loans has more than doubled to nearly 3.5 million in less than two years -- hundreds of thousands of them are falling out after failing to annually re-certify their earnings information, Education Department data show. This is undermining a key plank in the Obama administration's campaign to limit the potentially negative impact of rising federal student debt burdens.
Those who fall out or are kicked out of income-driven repayment plans, for causes ranging from borrowers' forgetfulness to loan servicers' incompetence, are forced to contend with a rash of potentially debilitating consequences, according to the Consumer Financial Protection Bureau. Among them: surprise overdraft fees, thousands of dollars in extra payments and interest, delayed loan forgiveness, and a jump in required monthly payments -- the CFPB calls them "payment shocks" -- that are so high that borrowers fall behind on their loans.
About 11.5 percent of outstanding student debt was late by at least three months or in default as of June 30, up from around 10.9 percent at the same time last year, according to the Federal Reserve Bank of New York. More borrowers fell behind on their debts despite what is certain to be an increase of at least 1 million federal loan borrowers enrolled in income-driven repayment plans, according to a Huffington Post projection derived from Education Department data.
"We know that borrowers are struggling, but without knowing where the problem spots pop up over the life of the loan, we’re not able to get to those borrowers in time and the results are staggering default and delinquency rates that are dragging down our entire economy," said Chris Hicks, who leads the Debt-Free Future campaign at the advocacy group Jobs With Justice.
HuffPost in April detailed how loan servicers were making it difficult for borrowers to remain in income-driven plans, and how the Education Department was publicly inflating enrollment by including borrowers who effectively have fallen out of the plans. In a recent Education Department study, some 57 percent of borrowers didn't re-certify their earnings information by the annual deadline.
The CFPB has since solicited comments from borrowers to learn more about what they experience when attempting to enroll or remain in an income-driven plan.
One borrower told the CFPB in an unverified complaint that she had sent Navient her paperwork some eight weeks before the deadline. The company failed to process her income information in time, leading her required monthly payment to skyrocket from $200 to $1,400 and causing an overdraft on her checking account.
Another reported that his loan servicer erroneously told him there was no record of his completed online application to remain in an income-driven plan, even though the borrower had a confirmation email.
In a blog post published Monday, Seth Frotman, the CFPB's top student loan official, told borrowers that they had described "detours and dead ends that prevent you from keeping your payments affordable under these plans, even when you’ve filled out the required paperwork."
Frotman said the agency is sending letters to various loan servicers -- the companies that process borrowers' monthly payments and counsel them on repayment plans -- to determine how often borrowers are falling out of income-driven plans and whether shoddy business practices are to blame.
The Education Department's main loan contractors -- Great Lakes Higher Education Corp. & Affiliates; Nelnet Inc.; Navient Corp., formerly known as Sallie Mae; and Pennsylvania Higher Education Assistance Agency, more commonly known as FedLoan Servicing -- service the vast majority of federal student loans. Neither Mary Boisen of Great Lakes, Keith New of FedLoan, Patricia Christel of Navient, nor Ben Kiser of Nelnet responded to requests for comment.
"As we've said before, we are very concerned that far too many borrowers do not recertify their income on time and then become delinquent," said Matt Lehrich, an Education Department spokesman. "The Obama Administration has taken landmark action to expand and improve income-driven repayment, and ensuring that borrowers can access and retain those benefits is one of our highest priorities."
The Education Department has launched a pilot program to determine what types of communications to borrowers are most effective at getting them to re-certify their earnings information by annual deadlines. It's also trying to develop a system that would allow loan servicers access to borrowers' tax information for several years, eliminating the need for annual re-certifications.
But much of the Education Department's effort is geared toward either improving borrower responsiveness or bypassing the need for servicer competence. By contrast, the CFPB is specifically targeting loan servicers' activities to determine whether they're doing right by borrowers or violating consumer protection laws. The consumer bureau has privately questioned at least one loan servicer about its income-driven enrollment figures and practices, according to industry executives and federal officials.
"If the Department of Education was doing its job, the Consumer Financial Protection Bureau wouldn’t need to send these letters to student loan servicers," Hicks said. "It’s concerning that the department isn’t taking this issue seriously, even though it has become a financial nightmare for the borrowers who are experiencing it firsthand."