How to Protect Yourself from Servicer Errors and Illegalities
Unfair Student Loan Practices
The student loan market has exploded in the last 15 years, increasing from $600 billion in 2006 to $1.2 trillion in 2016 to a whopping $1.52 trillion as of July 2019. Whether you're a student at a private or public college, odds are that you have student loans. Student loans are managed and repaid through a loan servicing company. Loan servicers such as Navient, Great Lakes, and NelNet serve as a critical link between lenders and borrowers.
Unfortunately, students and new grads often bear the cost of mistakes by loan servicers ranging from administrative error to outright illegal activities such as harassment. Many student loan borrowers may not even realize that they're paying more than they should or have recourse in certain situations.
This guide will enable you to:
- Identify your loan servicer
- Learn how to spot red flags for unfair practices
- Contact your loan servicer most effectively
- Report unfair practices
How Big is the Student Loan Servicer Problem?
When the Consumer Finance Protection Bureau (CFPB) partnered with the Department of Education and the Treasury to learn more about student loan servicing practices, they received tens of thousands of comments submitted from the public on potential solutions to improve service delivery. Among the many complaints emerged some themes, including:
- Surprise fees, damaged credit, lost loan records and repayment benefits resulting from loan servicer transfers
- Falling into default or a debt cycle as a direct result of poor customer service and lack of error resolution
- Non-disclosure of and non-facilitation of borrower benefits
- Predatory practices of so-called debt relief companies that target low-income and vulnerable borrowers
How to Find Your Loan Service Provider
The first step in managing your loan is determining your loan service provider. A student loan service provider is a private company that's contracted to handle the billing and other issues related to your student loans. Loan servicing companies handle loan repayment processing, consolidation, and repayment options. The Department of Education has a team of companies that provide loan services around the country. Your student loan servicer can change if the Department of Education transfers it to another company and your monthly payment may change as a result.
To find out who current your loan servicer is, use the Department of Education's National Student Loan Data System (NSLDS). The site allows you to retrieve your loan information from the central student aid database. You'll need your Federal Student AID ID and password:
- If you filled out the FAFSA and have logged into a federal student aid website any time after May 10, 2015, you should have an active FSA ID and password.
- If you forgot your username or password, NSLDS allows you to retrieve either via security questions or via e-mail.
- If you no longer have an FSA ID and password, you can create one here.
Unethical Practices of Loan Servicers
Your loan servicer should work with you to help you repay your loan, from processing your payments on-time to answering questions when they arise. Knowing what unfair practices look like and your options for responding helps you be proactive. As in any relationship, unfair practices are red flags that signal it's time to take action.
The Federal Trade Commission (FTC) protects consumer interests and works to prevent what they define as harassment or abusive behavior. They work to prevent harassment such as obscene or profane language, threatening violence, calling consumers repeatedly or at unreasonable hours, misrepresenting a consumer's legal rights, disclosing a consumer's personal affairs to third parties, and obtaining information about a consumer through false pretenses.
You may not know you're experiencing harassment, but watch for any of these signs:
- Receiving phone calls before 8 a.m. or after 9 p.m.
- Violating playground rules a.k.a. swearing, name-calling
- Calling you at work if you've asked them not to
- Calling you if they know you've retained a lawyer to handle your debt
- Calling multiple times in a row
- Threatening your arrest
Illegal practices may be more evident when you've fallen behind or your loan is in default. The Fair Debt Collection Act was passed in 1977, to help protect consumers from abusive debt collection practices. The FDCA establishes basic guidelines for how companies can interact with you when you owe them money. The Act prevents abusive behaviors like using foul language, misrepresenting themselves, communicating about your personal information with a third party, or reporting false information on your credit report. You're protected from these types of debt collection actions under the law and should report violations to the FTC via their online form.
Poor Customer Service
Inaccurate Billing Statements
Inaccurate billing statements suggest that your loan serving company is charging you the wrong amount. To verify your payment history, current repayment plan, and other details of your loan, visit NSLDS. Ask your loan servicer to provide you with a complete history of billing statements related to your loan, and compare that against your own payment records, repayment plan guidelines, and original loan contract.
Conflicting Repayment Information
Some student loan borrowers have reported conflicting repayment information, such as confusion regarding due dates, amounts, or even which repayment plans are available to them. Start by visiting Finaid.gov to learn more about general repayment options. Ask your loan servicer to provide you with a copy of your options in writing, along with estimates on monthly payments.
Incorrect Payment Processing
Your loan servicer is responsible for handling payment processing. This includes posting payments and late fees, how payments are allocated to your loan, and overseeing billing and loan payoffs. When payments are processed incorrectly, it can lead to late fees, the inability to participate in forgiveness programs, and more. If you suspect incorrect payment processing, access your payment history at the NSLDS website and collect copies of all your.
Unexpected Inflation of Minimum Payments
If your minimum payments increase unexpectedly, it's important to determine why. Some student loan payers are enrolled in graduated repayment programs where the minimum payments increase in "steps." You may have a variable interest rate loan that's been affected by an interest rate increase. Another possible explanation for a sudden increase in student payments is that the Department of Education changed the company servicing your loan. The new servicer may have a different repayment schedule and inflation of minimum payment may be one result. Contact your new loan servicer immediately if this is the case to establish a minimum payment you will be able to meet consistently.
Unexpected Inflation of Interest Rate
There are two types of interest on student loans: fixed and variable. A fixed-rate loan has a set interest rate for the life the loan, making it easy to predict what your payment will be each month. Variable rate interest loans, however, are tied to the federal rates. Federal loans issued before 2006, as well as private loans, may have variable rates. When the government raises interest rates, your interest rate and payment may increase as a result.
Unexpected Loan in Default
If you've made all your loan payments on time but find that your loan is in default, you may have been the victim of an auto-default clause. Many co-signed loans contain a clause that states if a co-signer dies or goes bankrupt that a loan will go into default - regardless if you're in good standing or continuing to make payments. It's also possible that your payments have been applied incorrectly. Gather information such as your original loan contract and evidence of payments before contacting your loan servicer.
Discouraging Alternative Payment Plans
Withholding Cancellation Information
In certain circumstances, student loans may be cancelled. Examples include when the student loan holder is totally and completely disabled, dies, in situations of school closure, and (rarely) if student loans are discharged in bankruptcy. Your loan servicing provider should discuss these options with the person liable for the loan (whether you or your parents), and whether circumstance has made you applicable for cancellation. Loan forgiveness programs are also available, ranging from teacher loan forgiveness to medical professional forgiveness. For more information, visit MoneyGeek's Student Loan Forgiveness and Cancellation Guide..
What to Do If You Suspect a Problem
If you suspect or recognize that there's a problem with your student loan, take the appropriate steps to resolve it. There are a number of different options, from gathering information to filing a lawsuit.
How to Prevent Problems with Your Servicer
The onus isn't on you to keep your loan servicer in check, but there are preventive measures you can take to mitigate or even avoid these abusive practices.
Your 5 Step Preventive Plan
Repay loans on time, in full (even if you don't finish your education).
Keep your contact info up to date with your servicer.
Make scheduled monthly payments (even if you don't get a bill or coupon booklet).
Notify your servicer immediately if you can't make a payment or your eligibility for cancellation or deferment is jeopardized.
Keep a folder of all your important documents. The Department of Education recommends the following:
- Financial aid award letters
- Loan counseling materials
- Your promissory note
- Amount of all student loans you've borrowed
- Account number (for each student loan you've received)
- Your loan servicer's contact info
- Loan disclosure(s)
- Your payment schedules
- A record of your monthly payments (keeping track of checks, printing out credit card statements)
- Notes about any questions you ask about your student loan, the answers, and the name of the person to whom you spoke
- Deferment or forbearance paperwork and notes of any phone calls to the loan servicer
- Documentation that you paid your loan in full
Helpful Tips for Co-Signers
Co-signing a student loan may enable your child or grandchild to pursue their educational dreams. But before you put your credit on the line, it's important to consider how this may impact your long-term finances. Some 90% of private student loans are co-signed. Yet, it seems that an equal 90% of requests to release co-signers from the arrangement were denied.
Before co-signing a loan, consider:
- Co-signing a loan is the same as taking full responsibility for the loan yourself. If the student is unable or unwilling to pay, ask yourself if you can cover the payments or pay off the balance without damaging your credit.
- Terms the lender provides for putting a loan into automatic default. In some cases, if your co-signer dies or files bankruptcy a loan may default even if you're willing and able to continue making payments. Avoid co-signing loans with automatic default clauses.
- Many lenders are under no obligation to communicate with co-signers, even when the primary borrower falls behind on payments. Before signing, find out the communications practices that a lender has for co-signers and how to get more information when you need it.
What trends or issues are you seeing right now around illegal or unfair practices in student lending?
Currently, many of the unfair practices that we are seeing aren't happening on the front end, but the back end, with fraudulent or deceptive services aimed at helping students "manage" their student loan debt.
You've heard the advertisements - services promising to get you into a "new government program" that will qualify you for loan forgiveness. The problem is, the programs that these companies are advertising - public service loan forgiveness or income-sensitive repayment programs - are completely free to borrowers. You don't need to pay a third party to qualify you or help you navigate the system. If you have federal student loans, just go to https://studentaid.ed.gov/sa/repay-loans.
Another deceptive practice is private companies using government-like website names to make borrowers think that they are using a government site. In fact, this practice got so out of control that, while in office, President Obama had to issue an executive order trademarking VA (Veterans Administration) and GI Bill®. Be sure ANY website you are using regarding your federal student loans has a .gov URL.
Finally, we have seen some for-profit schools offering "institutional" (or internal) loans in the past. In fact, the PEAKS program from ITT Tech is under some pretty serious federal scrutiny, with the Security and Exchange Commission and the Consumer Financial Protection Bureau filing suits alleging that the loan program defrauded investors by hiding losses. If you are considering a for-profit school, or any school that tries to sell you on an internal loan program, reconsider.
Are there specific types of colleges, universities or educational institutions that students should be wary of when considering borrowing? How can students evaluate this?
If you are thinking about attending a for-profit college - and especially an online-only for-profit college - look closely. For-profit colleges have long been under intense scrutiny, facing accusations ranging from serious inflation of job placement numbers, stories about inducing homeless students to enroll, and to using a sales technique called a "pain funnel" to convince desperate, down-on-their luck students to sign up for classes. In fact, a running list of state and federal complaints against for-profit colleges can be found at the Republic Report.
Do you have tips for students and parents that can help them recognize an unscrupulous lender before they sign a loan?
As much as you can, stick with the Federal Student Loan program. Look, it isn't perfect. And you may pay a little higher interest rate - especially if you are a graduate student. But the fact is that federal student loans come with income-sensitive repayment programs, loan forgiveness options (public service, disability, and - yes - death), and servicing options that private student lending simply is not competing with.
You have to educate yourself and take advantage of these programs. Most borrowers aren't signed up for income-sensitive repayment, despite the fact that they qualify for the program. And most borrowers who qualify for ten-year public service loan forgiveness have no idea the program even exists!
What steps should you take if you think you're the victim of unfair or illegal lending practices (after they've already taken the loan)?
Again, it depends if they've taken out a federal loan or a private loan. The Department of Education is currently debating new rules for making an application for discharge under something called Defense to Repayment. Basically, students who make this claim are saying that they were ripped off by a school, not by a servicer, because of claims the school made when they induced them to enroll and, therefore, to take out loans.
You may remember the Corinthian "Debt Strikers," the student borrowers who refused to repay their loans after the fraud at the for-profit chain they attended was uncovered. This claim, which had been rarely used before, really arose from their protest.
For most student borrowers who make this claim, there is some concrete fraud they allege the school they borrowed to attend committed. Inflation of job placement numbers, promised intern or externships that never materialized, or serious issues with job training are all examples of claims that are being made against the former for-profit college chain. If you think they may qualify for this discharge, you should contact your local legal services office.
If you're a federal borrower whose schools has closed either prior to or within six months of graduation, you are also eligible to have your loans discharged, under what's called a "Closed School Discharge." You can apply for this directly through your servicer. If you are currently enrolled in a school that is closing, and you are being offered a "teach out," you'll need to talk to an attorney and seriously consider your options. Accepting a "teach out" may negatively affect a borrower's ability to have your student loans discharged.
For other complaints, contact the Department of Education Office of the Ombudsman and make a complaint. If you are a private student loan borrower, you have a friend in the Consumer Financial Protection Bureau. Again, you should make a complaint to the Office of the Ombudsman. You can also reach out to your local civil legal aid office for help.
Do you have any tips around refinancing student loans?
Refinancing is a major part of the student loan discussion, but borrowers should proceed with caution. A lower interest rate is great for those in the private sector who can afford to make full monthly loan payments and pay their loans off on time or early. But for those who are struggling with monthly payments, a lower interest rate is not all it seems if, in return, they give up access to IBR or Public Service Loan Repayment. Further, leaving the federal loan program for state or private refinancing may be risky if you face a lay-off or change in income.
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