CFPB nominee sounds alarm on possible 'avalanche of defaults' after student loan payments restart
President Joe Biden’s nominee to America’s consumer watchdog agency told Congress he was concerned about how servicers would handle borrowers when their student loan payments — currently paused during the pandemic — resume in October.
“We are at a critical moment when so many borrowers are going to have to restart their payments,” Rohit Chopra said in response to a question about student loans during his nomination hearing this week. And the CFPB’s role will oversee how “servicers [are] communicating, and making sure that borrowers can navigate their options.”
Chopra, who is a member of the Federal Trade Commission, previously served at the Consumer Financial Protection Bureau (CFPB) after its establishment by Sen. Elizabeth Warren (D-MA). He was also a former student loan ombudsman for the bureau. Chopra appeared in front of the Senate Banking Committee on Tuesday.
“The CFPB has a big role to play in working with the Department of Education, State Attorneys General, ... to make sure that all of that is happening lawfully,” he added, “so we can avoid an avalanche of defaults when any moratorium might end.”
'Costs of inaction were too high'
Payments on trillions of dollars in federal student loans have been paused since March 2020. But there are other critical issues regarding the loan machinery that he’s likely to address if confirmed, Chopra said.
“One of the things that I've always kept front and center is [that] it is critical for regulators not to make the same mistakes that are made in the lead-up to the financial crisis," Chopra said. "The costs of inaction were too high, and some of the same issues that we saw in the mortgage servicing market I think were creeping into the student loan servicing market years ago.”
During the Obama administration, the CFPB was active in going after companies engaged in illegal practices regarding student loan servicing. For instance, in 2016, the CFPB took action against Wells Fargo for "illegal private student loan servicing practices that increased costs and unfairly penalized certain student loan borrowers."
In January 2017, the CFPB sued Navient for "systematically and illegally failing borrowers at every stage of repayment." At the state level, attorneys general have also pursued lawsuits against loan servicers for illegal practices.
We're suing Navient, one of the country’s largest student loan servicers, for misleading, deceptive, and unconscionable practices that have added to the heavy burden that student loan debt imposes on New Jersey residents.
— AG Gurbir Grewal (@NewJerseyOAG) October 20, 2020
PSLF another issue to tackle
Additionally, there are “many benefits, many programs, many contractual entitlements in a borrower’s loan note that they are eligible to enroll in, and if servicers or debt collectors are misrepresenting those options, that is a big problem,” Chopra said.
One of these programs is the Public Service Loan Forgiveness (PSLF). Created in 2007, the PSLF offers loan forgiveness after a borrower makes 10 years of repayments — or 120 on-time qualifying monthly payments. This option is offered to all public service workers.
But not all public servants have been able to take advantage of the program, due to issues such as incomplete paperwork or the fact that borrowers were on the wrong payment plan.
In 2017, Massachusetts Attorney General Maura Healey sued the Pennsylvania Higher Education Assistance Agency over its handling of the PSLF program. That lawsuit recently concluded in February this year.
“With respect to the Public Service Loan Forgiveness program, many members of the military, teachers depended on that when making their own career decision,” said Chopra. “So it's critical that loan servicers live up to their obligations.”
Chopra also shared concern over recent graduates’ ability to repay their debt.
They’re entering “a very tough job market, and they're also leaving school with an enormous amount of debt,” he said. “We’ve seen when you enter a tough job market it can be hard to stay afloat and people fall financially behind. We need to make sure they don't default.”
Particularly for borrowers of color, there’s a “double whammy,” he said.
“For many many people of color, families of color, they’re more likely to need to borrow to go to college and then in many cases, after graduating, continue to face a wage gap,” he said.
His first few steps in addressing the problems within the student loan system would be to “re-engage with the states, with the Department of Education, if confirmed, to make sure that those borrowers are not set more behind,” he stressed.
"This has implications for an entire generation, but also the ... racial wealth gap," Chopra said. "It’s very, very critical that we get this right.”
Aarthi is a reporter for Yahoo Finance. She can be reached at firstname.lastname@example.org. Follow her on Twitter @aarthiswami.
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