By Charlene Crowell
If you are a college student, a recent college graduate or even a college drop-out, student loan debt is not only likely, but probable. Among Black families, more than half – 52 percent – borrow for college costs, according to the Center for Responsible Lending (CRL).
Additionally, paying off college loans can take years, if not decades. If students fail to complete their program or secure a good paying job, they may find themselves at greater risk of defaulting on their loans. Today, more than 8 million student borrowers have fallen into default on more than $110 billion student loans.
So it is critically important that families sending their children to college as well as current and former students gain insights into their legal rights and the pitfalls that can arise when repaying student loans.
When entering into a student loan, borrowers and co-signers should clearly understand all of the loan terms. This includes understanding when payment on the loan will begin, how interest is assessed, and what types of repayment options are available. Student borrowers in distress should also understand their legal rights. For example, there are restrictions on when and how debt collectors may contact a borrower.
Borrowers who have paid their student loans as required may also have earned a tax benefit. This tax break could be particularly valuable to private student loan borrowers who incurred debt at higher interest rates than that offered by the federal government. However, borrowers rely on correct and timely information and forms from their servicer to be able to claim their deduction.
Scams are also popping up online to take advantage of student loan borrowers. Fraudulent companies peddle bogus student loan debt relief services. Others lure consumers in, charging them money for advice and services they could otherwise receive for free, like filling out federal student aid forms.
If you think these kinds of issues do not really amount to much – think again. The Consumer Financial Protection Bureau (CFPB) recently levied fines and restitution against a student loan servicer and a company providing financial aid advice for their violations that together affected more than 200,000 students.
On July 22, the CFPB ordered Discover Bank and its affiliates to return $16 million to more than 100,000 borrowers and an additional penalty of $2.5 million. Discover overstated the minimum amounts due on billing statements and denied consumers information they needed to obtain federal tax benefits. According to the CFPB, the company also engaged in illegal debt collection tactics.
“Discover created student debt stress for borrows by inflating their bills and misleading them about important benefits,” said CFPB Director Richard Cordray. “Illegal servicing and debt collection practices add insult to injury for borrowers struggling to pay back their loans.”
Maura Dundon, a CRL senior policy counsel, added, “The servicing and debt collection practices detailed in the Discover consent order demonstrate the harms that borrowers can face in the student loan market. The CFPB is appropriately investigating student loan servicers, but a larger, more comprehensive effort is urgently needed. The CFPB should develop new rules to protect all borrowers and address the abuses rampant in the broader student loan market.”
In response to the CFPB’s request for public statements on student loan servicing, CRL’s comments stated, “Origination is just the beginning of the lending process. Successful repayment depends in great part on the servicer, who controls every aspect of repayment, and serves as the gateway to any relief or assistance to which the borrower might be entitled.”
A second enforcement action occurred July 23, just one day later. Student Financial Aid Services, Inc. purportedly helps students and their families navigate the financial aid process and get the most aid for which they qualify by assisting them in filling out the Free Application for Federal Student Aid, also known as FAFSA. Its violations occurred when the corporation billed annual subscription charges without consumers’ knowledge or consent.
“Our enforcement action will put money back in the pockets of consumers who were misled while seeking to access federal student aid,” observed CFPB’s Cordray.
For consumer advocates, more work remains. As these actions show, student borrowers need to be vigilant when applying for student aid, choosing how much to borrow and repaying their debt. Regulators such as the CFPB should continue to help students by instituting needed reforms to this market.
As CRL noted in its recent student loan servicing comments, “Without improvement, borrowers will not be able to access the relief to which they are entitled, and may face default or additional finance charges that they could have avoided. They will continue to face unfair and deceptive practices that result in extra fees and interest charges, and slipshod practices that make it more difficult to manage their accounts responsibility.”