Spotting, Following up on & Preventing Financial Aid Abuse
Student loan debt in America currently stands at $1.5 trillion. With more than seven million student borrowers in default as of 2014, identifying how the process is failing the American public has received extensive attention in recent years. New research has uncovered one of the main culprits in the dramatic rise of national student debt: unfair loan servicing practices. Lawsuits have cropped up over the past few years demonstrating the illegal and unethical behavior exhibited by some loan companies. Learn about common unfair practices, how to spot predatory lenders and how to successfully repay loans.
Spotting Unfair Student Loan Practices
In an ideal world, loan servicers exist to help individuals manage the repayment of their student loans, answer questions along the way, and provide assistance or resources throughout the lifetime of the loan. Sometimes, however, loan servicers cause frustrations with borrowers as they struggle to find relevant information, talk to knowledgeable representatives of the servicer and understand their options for repayment. Although paying back student loans probably isn’t a process that borrowers will ever enjoy, they also shouldn’t have to contend with illegal, unethical or unsavory behaviors from their loan servicers.
Numerous consumer groups are currently calling for action by the federal government against Navient after the loan servicer initiated repetitive “robocalls” that intend to harass, abuse or otherwise annoy individuals. In many cases, loan servicers do not have consent to call borrowers, or their consent has been taken away.
Using threatening or profane language.
No loan servicer is allowed to operate outside the normal bounds of professionalism or business behavior. Any use of obscene language is prohibited, as is any language that is intimidating or threatening.
Providing public lists of people who haven’t paid their debts.
While loan servicers are allowed to provide information to credit reporting companies, they do not have the authority to make public any details about an individual’s loan status under long-standing federal privacy protection statutes.
Unethical Student Loan Practices
Lack of transparency.
During the application process, loan servicers who attempt to hide information about the terms of the loan or the repayment process are operating in a grey, unethical area. Examples of things that dishonest loan servicers may not be transparent about when borrowers are completing paperwork include fixed vs. variable interest rates, available repayment plans and increased minimum payments.
Improper management of payments.
Loan servicers are responsible for posting payments when they are made, but unethical loan servicers may inaccurately allocate funds, purposefully mishandle them or cause students to incur late fees even if they paid on time.
Dishonesty about repayment options.
The CFPB reports that, since at least January 2010, Navient operated in bad faith when advising borrowers to go into forbearance rather than using income-driven repayment plans. The servicer also knowingly provided vague or inaccurate information for borrowers trying to sign up for specific types of repayment plans.
Unsavory Student Loan Practices
Unprofessional customer service.
Making it impossible to get through to a human representative, allowing exceedingly long wait times for borrowers to be helped or even purposefully hanging up on a borrower are all examples of unprofessional behaviors exhibited by loan servicer customer service departments.
Withholding information about loan cancellation.
Exceptional circumstances allow for loans to be fully or partially canceled, and loan servicers should be transparent about this information. Examples include full and permanent disability or death of a borrower, a school closing before a student is able to complete their education, false loan certification, working in certain sectors or locations and, in rare cases, bankruptcy.
Withholding information about loan consolidation.
The purpose of loan consolidation is to bring multiple loans into a single payment while also lowering the overall interest rate. Loan servicers looking to collect maximum amounts of interest may withhold information that could help students consolidate their loans.
The U.S. Department of Education answers common questions about selecting ethical loan servicers and what to do if contacted by those engaged in illegal activities.
How to Identify Predatory Lenders
Defined by the Federal Deposit Insurance Corporation (FDIC) as the practice of imposing unjust and abusive loan terms on borrowers, predatory lending is a growing problem within higher education. Predatory lending always looks good on the surface. It may seem like a great interest rate or quick access to funds, but there’s always a catch – that often doesn’t surface until students have signed on the dotted line. These types of lenders are always out to make a profit at the expense of the borrower, typically by making it difficult to repay the loan and easier for students to fall into financial difficulties.
Predatory lenders prey on individuals who don’t know the ins and outs of safe lending, making students – particularly minority students and those who need to borrow significant amounts of money to make college a reality – a prime target.
When taking out a loan – or reviewing the terms of a loan already taken out – warning signs of predatory lending abound.
Abnormally high interest rates While lending guidelines state that any rate below 36 percent APR is considered affordable, many predatory lenders offer interest rates far above that number, making it nearly impossible to keep up with interest – let alone pay down the principal amount. As an example of reasonable interest rates to look for, interest rates of federal student loans currently range between 4.29 and 7 percent.
Vague additional costs Student loan costs, when provided by a reputable loan company, should include only principal and interest in the repayment scheme. Predatory lenders, on the other hand, often roll other unnecessary costs or services into the loan.
Unfixed interest rates While some loans may start out at a reasonable interest rate, predatory lenders don’t abide by the same rules as federal loans, which never increase. Some lenders may double or triple the interest rate over the lifespan of the loan, making it nearly impossible to pay off. One of the ways this is done is through refinancing, or loan flipping. While this process typically secures lower interest rates, predatory lenders use it as an opportunity to raise them.
Quick timelines Reputable loan agencies work with borrowers to ensure they’ve read and understood all of the policies and regulations associated with the loan being taken out. Predatory lenders, on the other hand, often try to rush borrowers through the process of signing paperwork in hopes that they won’t carefully review all documents and agree to egregious terms.
High-risk asset secured lending If a private student loan company ever requires you to secure the loan with an asset (such as a car, home, or other valuable item), walk away. Predatory lenders use this tactic, known as equity stripping, to get borrowers signed up for a loan they can’t afford with an astronomical interest rate in hopes that they will default on the loan and subsequently relinquish assets to the loan company.
Compulsory arbitration A common trick is to add language within the loan contract that prohibits borrowers from bringing charges against the company on the basis of fraud or misrepresentation. When this is the case, borrowers must use arbitration, which is typically skewed against them in these scenarios.
Prepayment penalties Although less common with student loans, predatory lenders may sometimes use this tactic to further burden the borrower. Prepayment penalties make it possible for lenders to charge fees to borrowers who make loan payments before the due date or try to pay the loan off early. The reasoning behind this, of course, is that predatory lenders won’t make as much money off interest charges if the lifespan of the loan is shortened.
Preventing Problems with Your Loan Servicer
Loan servicers are tasked with collecting principal and interest payments from borrowers. Seems simple, right? Legitimate lenders who are guaranteed by government entities typically present fewer issues, but some companies have been in trouble recently for violating acts meant to protect borrowers. Even if students select a well-known lender, it’s important to keep up with loan servicing to ensure everything is handled properly.
Examples of problems students may run into with their loan servicer include:
Funds from a payment have been misallocated
Closely review your monthly statements to ensure the current amounts are posted to the proper account.
You have tried to reach out to the loan servicer to resolve problems, but received no response
Erroneous information has shown up on your credit report
Contact your loan servicer to let them know they’ve spread misinformation. If unwilling to correct, contact the CFPB or FSAOG for further action.
Charging additional fees unrelated to the loan, then failing to refund the money or charging late fees and added interest on the initial erroneous additional fee
It’s always best to start with the loan servicer to try and get wrongs righted, so make sure all documentation of wrongdoing is in order before calling.
Withholding or making it very difficult to find information about additional payment options
Loan servicers rarely act in the interest of the consumer, so it’s up to students to find out exactly what their rights are and if additional payment plans that better fit their budgets are available.
Changes are made to loans without borrowers receiving updated information
Servicers often don’t inform borrowers about changes unless they specifically ask, so take time to call into customer service a few times a year to find out if any changes have been made or if there are new repayment plans that benefit you.
Your records show a different number of payments or outstanding balance than that of the loan servicer
Loan servicers are notorious for providing misinformation or keeping faulty records, so make sure you have documentation of every payment made and keep a running tally of the remaining principal on your loan.
Protections that used to be in place have seemingly disappeared recently
Talk to your congressional representative. Under the current presidential administration, the Secretary of Education recently rolled back a range of student borrower protections, including a 60-day grace period that allowed students the opportunity to make a payment instead of going in default. Students now incur an automatic fee as high as 16 percent on the amount of their loan balance if they go into default.
How to Follow Up on a Suspected Problem
Although some loan servicers may engage in unfair activities with borrowers, students still have several options when it comes to holding the loan company accountable. Students with a federal loan can work with the Federal Student Aid Ombudsman Group to resolve any disputes related to their loans. This independent office is considered a last resort, so student borrowers should try to work with their federal lender before reaching this step.
Students with private loans, after exhausting other options, can file a complaint with the Consumer Financial Protection Bureau. According to Jill Rayner, Director of Financial Aid at the University of North Georgia, not many students have even heard of the CFPB. “Most people do not know we have this government agency, but they have some really great information for students and can also be great advocates for them,” she notes.
Working with the CFPB can often get the attention of the loan servicer when it has been unresponsive previously, or provide mediation for an ongoing dispute. The CFPB has handled more than one million disputes since being formed in 2011, with 97 percent of consumers reporting they received timely responses – most within 15 days of filing the complaint. Steps for submitting a formal complaint via the CFPB include:
STEP 1 Create an accountUsers are allowed to submit complaints via the CFPB’s secure portal, but they must create an account and log-in to do so. Opening an account is free, easy, and should only take a few minutes.
STEP 2 Gather supporting documents Before sitting down to write about a negative experience with a loan servicer, it’s important to ensure all relevant documents and information are available. Some of the things students should have at the ready include dates of relevant communication, the amount being disputed, and any other details about the issue. All assertions made by the student about their loan servicer should be supported by carefully kept records.
STEP 3 Submit the complaint The CFPB complaint application includes several questions to help the bureau better understand the nature of the problem. Questions that students can prepare to answer include:
What is this complaint about?
What type of problem are you having?
What company is this complaint about?
Who are the people involved?
STEP 4 Complaint review and routing Once the CFPB receives a complaint, the bureau forwards it and any supporting documents to the company and begins working with them to get a response. If the bureau decides there’s a better governmental agency to handle the complaint, it will be routed to that department.
STEP 5 Response from company After receiving details of the complaint from the CFPB, the loan servicer is responsible for reviewing those details and communicating with the student to rectify the issue. The company then reports back to the CFPB about what steps will be taken to ensure the matter is closed.
STEP 6 Publishing of complaint Regardless of outcome, the CFPB publishes the subject and date of the complaint to the Consumer Complaint Database. If the student agrees, details of the complaint will also be published.
STEP 7 Review Once the company provides their final response, students are invited to review these details and have 60 days to provide feedback about the overall grievance process.
From the Expert
Jill Rayner is the Director of Financial Aid at the University of Georgia Dahlonega campus.
How can students know if their lenders are predatory? Are there certain signs they should look for?
Before students consider borrowing loan funds from a private lender, they need to make sure they have borrowed all of their federal funds first. The student needs to complete the FAFSA and borrow the federal loans to help with the cost first. Federal loans have several repayment options so it is important to look at those loans first before private funds.
You want to make sure your read the promissory note you are signing. How much is your interest? How much are they taking out as a processing fee to do they loan? We have seen some as high as 10 percent. What are your repayment options when you get out of school? Are there any ways to reduce my interest by having my payment auto debited from my account?
With student debt rising tremendously in recent years, what part do predatory lenders engaging in unfair practices have to play?
Predatory lenders play a part in the student debt rising but a lot of the problem with student debt also relate to students. We have students who borrow more than their student invoice. They borrow funds to help pay for housing, their cell phone, their transportation and personal expense. They should be borrowing the minimum amount they need to get by. Questions they need to ask themselves: Can I get three or four roommates to help with housing expenses? Can I drive a used car until its wheels fall off so I don’t have a car payment or high insurance? Can I do without that high price coffee and make coffee at home? I need to live like a poor college student and borrow as little as possible. The decisions they make in their four years in school can change their life for the next 30 years.
Bringing It All Together: Paying Your Loans the Smart Way
Even when students have reputable loans with well-regarded servicers, paying off student debt while seeking a first job and getting settled into post-college life can be hard. Juggling new responsibilities and schedules alongside creating a budget for after finishing a degree can take time, and it’s easy to let payments fall through the cracks amidst so much change. No matter whether an individual has made each payment on time or is struggling with a defaulted loan, the tips below can help grads stay on track with their student loans.
Don’t pretend they don’t exist It may be tempting to ignore late payment emails or phone calls from your loan servicer, but this is definitely a no-no. Loan servicers aren’t going to go away simply because you ignore their attempts at contacting you, but there could be serious consequences for not making payments.
Find a suitable payment plan Students must assess their current earning potential and their style of living to decide if they want to pay their loans off quickly or pay the lowest amount possible per month. The answer to this question may change over the lifecycle of the loan, but the important thing in the beginning is to find a manageable monthly payment. Some recent graduates opt for income-driven repayment plans. This option assesses the borrower’s annual income and creates a monthly payment that’s a reasonable percentage of that amount. Students who don’t change the standard payment plan that comes with the loan are typically expected to complete all payments within 10 years of the loan origination date.
Consolidate and refinance Graduates who choose to refinance their loans are often able to decrease their interest rates, thereby making it easier to pay them off as more of their monthly payment will be going toward the principal instead of interest fees. While some loans can run between five and 10 percent APR, refinancing rates for student loans can currently be found below three percent. If graduates have multiple student loans, consolidation is also a great option. Once loans are consolidated, grads are responsible for just one monthly payment. It’s important to make sure no loan with an already-low interest rate is consolidated to a higher rate, but generally each loan that is refinanced or consolidated can receive a lower interest rate. Financial aid expert Jill Rayner of the University of North Georgia reminds grads that it’s still important to review the terms of refinancing and consolidation before signing the dotted line. “Make sure you know the terms of the loan, it will save you many headaches down the road,” she urges.
Seek out any loan forgiveness programs for which you may qualify The U.S. Department of Education offers loan forgiveness plans for teachers and public servants, provided they meet specific requirements. Teachers must work five consecutive years on a full-time basis in a qualifying elementary or secondary school to receive forgiveness of up to $17,500 in loans. Public servants working at a government agency or nonprofit on a full-time basis can have the remainder of their loans forgiven after making 120 payments (the equivalent of 10 years of payments).
Deferment or forbearance Grads facing financial difficulties for a short season are allowed to apply for forbearance or deferment of their federal student loan payments. Students with specific types of federal loans generally aren’t harmed by deferment plans since they aren’t responsible for paying the interest that accrues during the deferment period. This is true for direct subsidized loans, subsidized federal Stafford loans, and federal Perkins Loans. All other deferred loans continue accruing interest that must be paid by the student. Those who choose forbearance will be responsible for paying interest accrued during the lifecycle, regardless of the type of loan.
Consumer Information on Student Loans The Federal Trade Commission and the U.S. Department of Education created this comprehensive joint publication to help students understand different types of loans and how to recognize predatory policies.
The Project on Student Debt Maintained by the Institute for College Access and Success, this interactive project tracks national student debt and provides helpful tips to graduates trying to pay off existing student loans.
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