Improving the Administration and Collection Process for Government-Sponsored Student Loans
In this regard, Hogarth and Merry emphasize that, “While many financial service firms provide product information in the absence of mandatory disclosure requirements, the presence of these requirements imposes common standards of terminology, presentation, and calculation of relevant figures that can aid consumers in making comparisons between products and providers.”11 This approach is a far cry from the types of disclosure practices that existed in the United States in the early 1960s when disclosures for interest rates on consumer credit products were primarily controlled by state law, and a wide array of standards were used by lenders.12 This problem was addressed by the Truth in Lending Act by creating a common set of national disclosure standards concerning the respective costs of different types of loans.
The CFPB has reported that students with private loans that are attempting to pay off or reduce their loan amounts are being deceived into paying higher fees with longer repayment terms that inevitably damage their credit ratings.13 The CFPB has expressed increasing concern over the increasing numbers of private student loans and their corresponding default rates. According to the editors of American Banker, “The CFPB -- which has made aggressive steps in 2013 to monitor the private student loan market -- recently said that there are 7 million student loan borrowers who have defaulted in a market with more than $1.2 trillion in outstanding student loan debt.”14 By any measure, $1.2 trillion represents an enormous investment in America’s future, but this future is threatened by the potential default of many students who find themselves unable to repay these loans when they come due.
Despite the fact that the majority of student loans continue to originate with the federal government, students who do assume responsibility for private loans are being placed at a disadvantage compared to federal loans because private loans are typically charged at higher and variable interest rates. In fact, the majority of the recent complaints from student borrowers have related to being manipulated by loan servicers in ways that bilk them out of even more money. For instance, the editors of American Banker point out that, “Many of the 3,800 private student loan complaints that the CFPB reviewed from October 2012 through September were related to payment processing issues, particularly when the borrower tried to pay off the debt early or set up a certain periodic payment structure but incurred a fee to do so.” 15
The CFPB has also reported that borrowers with more than one student loan have been unable to pay additional amounts on the loan that carries the highest interest rate; rather, their payments have been distributed equally across all loans, thereby extending the loan repayment period.16 In reality, though, these practices are understandable because the longer students require to pay their loans off, the more money loan servicers will generate even though paying off a student loan as early as possible is in the best interest of borrowers. This practice represents a growing concern for policymakers because the provisions of the amended Truth in Lending Act of 2008 prohibit the imposition of penalties for the early repayment of private student loans.17 In other cases, students have been charged extra fees if they tried to modify or reduce their monthly payment arrangements, while in yet other cases their payments have been distributed among different loans in ways that cause them to be charged with other additional fees. In this regard, the editors of American Banker report that, “In certain cases, student loan servicers applied payments in such a way that struggling borrowers did not meet the minimum payment on multiple loans, incurring multiple late fees.”18
In order for students to make an informed judgment concerning their capability of repaying student loans in the future, they must be able to calculate their chances of actually finishing a degree program and they must be able to fully comprehend the terms of their loan repayment. Because student loans represent such a major investment in the future, it is vitally important for borrowers to receive full disclosure concerning the terms of repayment and any potential hidden charges that may be assessed.19
Unfortunately, the CFPB confirms that loans continue to be made to students with minimal analysis of their potential ability to repay loans, and these loans are made without any cosigners to guarantee repayment. As the editors of American Banker conclude, “Unlike federal loans, there is often no safety net built into these loan programs, such as loan forbearance or modification rights for those who are unable to…
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