If you have struggled with a laundry list of unanswered questions or even been led astray during the loan repayment process, then you are certainly not alone. Last week, an independent government watchdog released a scathing new report claiming that the Department of Education has failed to hold loan servicing companies accountable for violating the law.
The report highlights two main areas of non-compliance on the part of loan servicing companies that the Department did not adequately oversee. First, the report finds that loan servicers often failed to provide borrowers with accurate information about their loan repayment options, sometimes placing their accounts in forbearance when other, more affordable options were available. Second, loan servicers often failed to calculate the amount that borrowers in Income-Driven Repayment plans actually owed.
“Borrowers have been suffering from sloppy loan servicing—misinformation, erroneous billing, and illegal practices for which servicers have been sued—for years, but that’s not news to us,” says Vincent Tran, co-founder and Chief Product Officer of Summer.
“What this report highlights is the systemic failure, including at the government unit responsible for providing oversight, that exacerbates the hardships that student loan borrowers face. Even the government is acknowledging how broken the system is.”
The report finds that the Department not only fell short in its responsibility to track whether loan servicers actually followed federal requirements, but also neglected to use the tools at its disposal to discipline these companies when they did not comply with federal rules.
Contracts the Department has with outside loan servicing companies include provisions requiring these companies to return money they charge the government while they are not in compliance with federal regulations. The report suggests, however, that the Department rarely used these provisions to force companies to return money they took during periods of noncompliance.
“As a result,” the report says, “borrowers might not have received the most favorable repayment terms available to them, and servicers might have been paid more than they should have been under their contracts.”
In addition, the Department’s method for giving new loans to these companies did not take into account whether or not they had previously complied with federal regulations or provided satisfactory service to borrowers, according to the report. Moreover, these contracts did not include any way for the Department to assess loan servicers’ track record or performance. The Department’s data collection on servicer noncompliance has also been lacking, the report finds, further impairing oversight.
“By rarely holding servicers accountable for instances of noncompliance with federal loan servicing requirements, [the Department] is not providing servicers with incentive to take actions to mitigate the risk of continued noncompliance that harms students and their families,” the report says. “By not holding servicers accountable, [the Department] could give its servicers the impression that it is not concerned with servicer noncompliance with federal loan servicing requirements, including protecting borrowers’ rights.”
In response to the report, James F. Manning, Acting Chief Operating Officer, expressed the office’s differences with the report findings, but the Department broadly accepted the recommendations for improvement in the report. These include better tracking servicer compliance with federal regulations, analyzing records of noncompliance to improve evaluations of servicer violations, and holding servicers financially accountable when they fail to comply with regulations, as well as gathering more complete data on interactions between servicers and borrowers.
So what does this mean for you? If you feel like you were given wrong information or your were led astray by your loan servicer, then share your story with us. You can submit it to [email protected], and we encourage you to receive further industry updates and access to our free tools by signing up below.