Government report details 'widespread, illegal scheme' by student loan servicers

A consumer advocate called for immediate action after a Consumer Financial Protection Bureau (CFPB) report this week flagged legal violations by student loan servicers that administer the Public Service Loan Forgiveness (PSLF) program.

"This report should put to rest once and for all that it's not that borrowers don't get it — it's that the student loan industry engaged in a widespread, illegal scheme to stop dedicated public servants from getting the relief that they were entitled to," Seth Frotman, former student loan ombudsman at the CFPB and current executive director at the Student Borrower Protection Center (SBPC), told Yahoo Finance. "This leaves no doubt that the Biden administration and the Secretary of Education needs to right this wrong."

Frotman urged Education Secretary Miguel Cardona to "use his authority to right this tremendous wrong and deliver debt relief to these borrowers" by fixing the program. 

“The latest CFPB report raises serious concerns about the treatment of federal student loan borrowers and the quality of service provided by loan servicers," Education Department Spokesperson Kelly Leon told Yahoo Finance in a statement, noting the department plans to take action in conjunction with the CFPB and state attorneys general. 

"All borrowers should receive the benefits to which they are entitled — and if servicers are blocking borrowers from receiving those benefits, the government must take steps to address it," Leon said.

CFPB found errors in servicers' information to student loan borrowers

Designed by Congress to help public servants, the PSLF program enables government and non-profit employees with federally-backed student loans to apply for forgiveness after proof of 120 monthly payments under a qualifying repayment plan.

But the program has been rife with problems, including steep denial rates. Recent data revealed that not even 1% of the more than 390,000 PSLF forms submitted between November 2020 and April of this year met the requirements for forgiveness.

Part of the problem could lie with the way servicers communicate with borrowers.  

For instance, the CFPB's examiners found several issues with how student loan servicers dealt with borrowers in the Federal Family Education Loan Program (FFELP) who were trying to work towards PSLF. These borrowers must consolidate into a Direct Consolidation Loan first, and then make eligible payments toward the 120 needed for forgiveness through PSLF.

But the CFPB report found the following problems: 

  • Student loan servicers' employees wasted borrowers’ time by asking FFELP borrowers to file an employer certification form to check whether they were eligible, even though they would be rejected because FFELP loans are not directly eligible for PSLF. Borrowers needed to know that they have to consolidate their FFELP loans before submitting employer certification forms.

  • Student loan servicers' employees wrongly told borrowers that FFELP loans couldn’t qualify for PSLF. (FFELP borrowers can consolidate and then apply for PSLF). 

  • Student loan servicers' employees wrongly told borrowers that they could only apply for PSLF if their employer is a nonprofit. (Qualifying employers can also include state, local, and the federal government.)

Frotman said part of the reason for student loan servicers' confusion over how to treat FFELP borrowers was because the Education Department's (ED) lack of guidance.

In December, the SBPC and the American Federation of Teachers published a report flagging some of the issues the CFPB raised this week, as well as how ED had over the years "failed to provide any regulation, guidance, or direction to student loan companies that advise public service workers about their right to PSLF."

'Troubling and sad'

The CFPB also found other issues with student loan servicers outside of the PSLF program, including automatically enrolling student loan borrowers in natural disaster forbearance based on their zip code even though borrowers didn't request it.

Being placed in forbearance can be costly: It could result in borrowers losing payment incentives, such as interest rate reductions for making on-time payments, accruing unnecessary unpaid interest during the period, or messing up the auto-debit process.

Ultimately, "the troubling and sad thing about this is that on nearly every one of these reports, there are significant problems that the [CFPB] finds when it comes to student loan servicing," said Frotman. "This edition of the report is no exception. It is a reminder about how much more work there is to be done."

Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected] Follow her on Twitter @aarthiswami.

Read more:

  • Student loan servicer censured over 'what appears to be false' congressional testimony

  • 9 in 10 student loan borrowers aren't ready to begin payments again, survey finds

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