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Private Student-Loan Borrowers Voice Concerns

Since March, when the new federal Consumer Financial Protection Bureau asked borrowers to share their complaints about private student loans, it has received nearly 2,900 responses.

On Monday, the bureau's student-loan ombudsman released his first annual report outlining borrowers' concerns and recommending changes to help Americans who hold nearly 850,000 individual private loans, currently totaling $8 billion.

The most prevalent problems confronting borrowers were related to repaying loans—fees, billing, deferment, forbearance, fraud, and credit reporting. Those issues made up 65 percent of the complaints. Another 30 percent were connected to default, debt collection, and bankruptcy. Five percent of borrowers complained about problems getting a loan, such as confusing terms, rate, and denial; confusing advertising or marketing; sales tactics or pressure; financial-aid services; and recruiting.

The report draws parallels to the housing-loan crisis. "The breadth of potential servicing errors and the inability to easily modify a loan bear an uncomfortable resemblance to experiences faced by homeowners in the mortgage market," the report says. "Mortgage borrowers have complained, among other things, about inappropriate application of payments, timeliness in error resolution, and inability to contact appropriate personnel when facing economic hardship. Many of these complaints are strikingly similar to the input provided by and complaints received from student-loan borrowers."

The private student-loan market is highly consolidated, with seven major companies handling most loans. The most complaints to the CFPB were against Sallie Mae (46 percent), followed by American Education Services at 12 percent.

Concern over private loans has been mounting as research has found students unnecessarily take them out and many are uninformed about the process. Federal student loans often have better terms and protections for borrowers, and experts suggest they should be students' first choice.

To remedy the situation, the CFPB recommends Congress look for opportunities to spur the availability of loan modification and refinance options for student-loan borrowers. Many students have been unable to take advantage of today's historically low interest environment and are paying interest rates that do not match their risk profile. "Addressing these impediments to refinance options may prove to be valuable not just for individual borrowers, but for the housing market and the broader economy," the report says.

Given the severe consequences on a borrower's credit rating from defaulting, the ombudsman also suggests policymakers consider ways to facilitate student-loan modifications and help student borrowers emerge from financial distress. Perhaps efforts to correct problems in mortgage servicing could be applied to improve the quality of student-loan servicing, the report says.

The CFPB supports initiatives to increase adoption of the Income-Based Repayment program for federal student loans to help borrowers better manage their debt. The report suggests agencies might consider working with nonprofit organizations on distressed-borrower hotlines to increase awareness of the program and others.

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