Another Report About Federal Student Loan Servicer Misconduct
When are we going to see ACTIONS that protect affected students from servicer misconduct?
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Mary Lyn Hammer is an expert resource for journalists who need reliable answers to tough questions about how the federal government handles student loans, cohort default rates, financial literacy, and higher education loan regulations and legislation.
October 4, 2016—Phoenix, AZ
The Consumer Financial Protection Bureau FINALLY issued a report that supports what Ms. Mary Lyn Hammer, a student advocate, has been telling officials, policy makers and the U.S. Department of Education for years—that federal student loan servicers are engaging in practices that harm students and increase profits for the federal government through the ED Department as well as lenders and servicers through misapplied student loan payments.
Ms. Hammer said in a statement, “If I sound frustrated, I am! For years I’ve told federal officials that students’ additional payments have not been properly applied to principal reduction. In fact, on numerous occasions I’ve provided suggested legislative language to define how payments should be applied yet, to date, all we have seen is another federal report. When will action be taken to correct these issues?”
For those student loan borrowers who are actually trying to pay their loans off early, a lack of mandated application of payments first to outstanding late fees and “accrued” interest and then to principle reduction is getting in the way of their goals to get out from under the student loan debt as fast as they can. Many of the additional payments made by student loan borrowers are applied to future payments instead of to principal reduction. When this happens, the lenders retain profits in the form of “unaccrued” and “unearned” interest and there is no savings for the student borrowers like there should be if they pay their loans of early.
Not only is applying additional payments to future payments against the law in several states, it is also simply wrong to do. Profit on student loans is at record-breaking levels and profits are made through the interest charged on the loans. Lowering payments which extend the repayment period as well as applying additional payments to future payments instead of reducing the principal balance of the loans are practices that feed the coffers of the lenders—in this case, primarily the U.S. Department of Education.
The Consumer Financial Protection Bureau (CFPB) yesterday expressed concern that student loan servicers may be making it harder for borrowers to pay off their loans. A blog written by CFPB Student Loan Ombudsman, Seth Frotman, notes that the Bureau has received complaints from borrowers who said that after trying to make advance payments to lower their student loan’s principal, they were “sidetracked by their student loan servicer.” Borrowers told the CFPB that after making overpayments, their loan servicer allegedly lowered their monthly payments and lengthened the repayment term without their knowledge.
“These borrowers report that by lowering the consumer’s monthly payment amounts, their servicers extended the repayment period and the amount of interest a consumer would pay. Consumers report that their servicers did this without the borrower having requested this change and, in some cases, without letting the borrower know this change was coming,” Mr. Frotman wrote. “While lower monthly payments could sound like a good thing, if consumers paid according to the new billing statement amounts sent by their servicers, they would make smaller payments over a longer time—potentially increasing the total cost of their loans by hundreds of dollars.
In an effort to help those borrowers who wish to continue paying extra each month, Mr. Frotman suggested that they first make sure they are still on track to pay off their student loans. “Take a look at your monthly statement and your account payment history (generally available for free on your servicer’s website). If you discover that your servicer has lowered the monthly payment for your loans and you’re trying to pay off your debt more quickly, you can tell your servicer to set your monthly payment back to your requested payment amount, or choose to make extra payments each month,” he wrote. He also suggested that borrowers tell their servicer where they want any extra money beyond the minimum monthly payment to be applied (to the loan with the highest interest rate or the lowest balance, for example). In addition, Mr. Frotman told borrowers to be sure their extra money is not advancing the loan’s due date which would cause their servicer to give them a “payment holiday.” Finally, Mr. Frotman reminded borrowers that they should ask for help if something doesn’t appear to be correct.
When students discover that their payments have been misapplied, they must contact the servicer, have the payments reversed and reapplied properly—with all additional payments applied to principal reduction. Sometimes this can take months if it is ever corrected at all. Champion College Services (Champion), Ms. Hammer’s 27-year-old default prevention company, advocates for these corrections on a regular basis for those student borrowers they serve. For many students who don’t have an advocate like Champion, the process of getting loan payments correctly applied can be exhaustive and frustrating.
“When is Congress going to make changes to the system that truly protect students just because it is the right thing to do?” Ms. Hammer asks. When the last reported profit on student loans was $41.3 billion (2013), intentions can be questioned. Do we really need to wait for a federal report to be published to correct what we know is wrong for our children and our citizens? These complaints have been coming in for years. We all know it’s wrong even without the report—so when are we going to see a law that forces federal servicers to properly apply payments? When will Congress or the U.S. Department of Education force the federal servicers to back out these misapplied payments and reapply them properly? It’s an easy query for data managers—the cohort consists of borrowers in a repayment status with a due date more than 30 days in the future.
Ms. Hammer states, “I do not understand why it literally takes an act of Congress for students to have additional payments they make applied to the principle of their student loan, when in any other industry this is a standard policy.”
Ms. Hammer included legislative suggestions for applying student loan payments in her special investigative report, Injustice for All, in Chapter IX. Legislative Solutions That Promote Accountability, under “Serving the Students’ Best Interest”, page 233. The “Reader’s Notes” for Injustice for All are available at http://www.marylynhammer.com/reader_notes_for_executives_journalists_and_bloggers/.
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