Government report details 'widespread, illegal scheme' by student loan servicers

·Reporter

June 30, 2021 at 6:04 PM·4 min read

A consumer advocate called for immediate action after a Consumer Financial Protection Bureau (CFPB) report this week flagged legal violations by student loan servicers that administer the Public Service Loan Forgiveness (PSLF) program.

"This report should put to rest once and for all that it's not that borrowers don't get it — it's that the student loan industry engaged in a widespread, illegal scheme to stop dedicated public servants from getting the relief that they were entitled to," Seth Frotman, former student loan ombudsman at the CFPB and current executive director at the Student Borrower Protection Center (SBPC), told Yahoo Finance. "This leaves no doubt that the Biden administration and the Secretary of Education needs to right this wrong."

Frotman urged Education Secretary Miguel Cardona to "use his authority to right this tremendous wrong and deliver debt relief to these borrowers" by fixing the program.

“The latest CFPB report raises serious concerns about the treatment of federal student loan borrowers and the quality of service provided by loan servicers," Education Department Spokesperson Kelly Leon told Yahoo Finance in a statement, noting the department plans to take action in conjunction with the CFPB and state attorneys general.

"All borrowers should receive the benefits to which they are entitled — and if servicers are blocking borrowers from receiving those benefits, the government must take steps to address it," Leon said.

NEW YORK, NEW YORK - MARCH 30: Firefighters stand outside a store on the Upper West Side amid the coronavirus pandemic on March 30, 2021 in New York City. After undergoing various shutdown orders for the past 12 months the city is currently in phase 4 of its reopening plan, allowing for the reopening of low-risk outdoor activities, movie and television productions, indoor dining as well as the opening of movie theaters, all with capacity restrictions. (Photo by Noam Galai/Getty Images) — Firefighters stand outside a store on the Upper West Side amid the coronavirus pandemic on March 30, 2021 in New York City. (Photo by Noam Galai/Getty Images) (Noam Galai via Getty Images)

CFPB found errors in servicers' information to student loan borrowers

Designed by Congress to help public servants, the PSLF program enables government and non-profit employees with federally-backed student loans to apply for forgiveness after proof of 120 monthly payments under a qualifying repayment plan.

But the program has been rife with problems, including steep denial rates. Recent data revealed that not even 1% of the more than 390,000 PSLF forms submitted between November 2020 and April of this year met the requirements for forgiveness.

Part of the problem could lie with the way servicers communicate with borrowers.

For instance, the CFPB's examiners found several issues with how student loan servicers dealt with borrowers in the Federal Family Education Loan Program (FFELP) who were trying to work towards PSLF. These borrowers must consolidate into a Direct Consolidation Loan first, and then make eligible payments toward the 120 needed for forgiveness through PSLF.

A US flag flies above a building as students earning degrees at Pasadena City College participate in the graduation ceremony, June 14, 2019, in Pasadena, California. - With 45 million borrowers owing $1.5 trillion, the student debt crisis in the United States has exploded in recent years and has become a key electoral issue in the run-up to the 2020 presidential elections. — A US flag flies above a building as students earning degrees at Pasadena City College participate in the graduation ceremony, June 14, 2019, in Pasadena, California. (Photo by Robyn Beck / AFP) (ROBYN BECK via Getty Images)

But the CFPB report found the following problems:

Student loan servicers' employees wasted borrowers’ time by asking FFELP borrowers to file an employer certification form to check whether they were eligible, even though they would be rejected because FFELP loans are not directly eligible for PSLF. Borrowers needed to know that they have to consolidate their FFELP loans before submitting employer certification forms.
Student loan servicers' employees wrongly told borrowers that FFELP loans couldn’t qualify for PSLF. (FFELP borrowers can consolidate and then apply for PSLF).
Student loan servicers' employees wrongly told borrowers that they could only apply for PSLF if their employer is a nonprofit. (Qualifying employers can also include state, local, and the federal government.)

Frotman said part of the reason for student loan servicers' confusion over how to treat FFELP borrowers was because the Education Department's (ED) lack of guidance.

In December, the SBPC and the American Federation of Teachers published a report flagging some of the issues the CFPB raised this week, as well as how ED had over the years "failed to provide any regulation, guidance, or direction to student loan companies that advise public service workers about their right to PSLF."

Cumru Twp, PA - April 14: Sabrina Werley works with 4th grade student Jeremiah Ruiz during a math support class. During class with Learning Support teacher Sabrina Werley at Cumru Elementary School in Cumru township Wednesday morning April 14, 2021. Werley is the 2021 recipient of the Annie Sullivan Award, which recognizes local educators for their service to students with special needs. (Photo by Ben Hasty/MediaNews Group/Reading Eagle via Getty Images) — Learning Support Sabrina Werley works with 4th grade student Jeremiah Ruiz during a math support class. (Photo by Ben Hasty/MediaNews Group/Reading Eagle via Getty Images) (MediaNews Group/Reading Eagle via Getty Images via Getty Images)

'Troubling and sad'

The CFPB also found other issues with student loan servicers outside of the PSLF program, including automatically enrolling student loan borrowers in natural disaster forbearance based on their zip code even though borrowers didn't request it.

Being placed in forbearance can be costly: It could result in borrowers losing payment incentives, such as interest rate reductions for making on-time payments, accruing unnecessary unpaid interest during the period, or messing up the auto-debit process.

Ultimately, "the troubling and sad thing about this is that on nearly every one of these reports, there are significant problems that the [CFPB] finds when it comes to student loan servicing," said Frotman. "This edition of the report is no exception. It is a reminder about how much more work there is to be done."

—

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.

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CFPB found errors in servicers' information to student loan borrowers

'Troubling and sad'

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