A new report from the Consumer Financial Protection Bureau found that some servicers of federal student loans are denying borrowers access to income-driven repayment plans or failing to approve those applications.
The Fall 2016 Supervisory Highlights report released Monday — the 13th annual overview — covers federal and private student loans as well as auto loans, mortgages and fair lending.
“Despite [having] the right to an income-driven plan, borrowers still struggle to enroll,” CFPB ombudsman Seth Frotman says. “Generally, processing your application should take no more than two weeks. However, many borrowers have told us that their applications sit under review for months at a time.”
Income-driven repayment, or IDR, plans are intended to help borrowers manage their monthly federal payments by capping them at a percentage of their incomes. Any amount that’s unpaid after 20 to 25 years of making qualified payments on those plans will be forgiven.
When borrowers are prevented from participating in affordable repayment plans, the consequences can be costly. Payments on the standard repayment plan, for example, typically are higher than on an IDR, so it’s easier to fall behind. That can lead to unnecessary costs, such as capitalized interest if a loan goes into forbearance, or potentially can put borrowers at risk of default. Borrowers may also lose out on months of qualified affordable payments that would count toward loan forgiveness.
Lauren Asher, president of the nonprofit Institute for College Access and Success, says the CFPB report highlights how important it is that student loan servicers alert struggling borrowers to this option, instead of ushering them into forbearance. “Income-driven repayment won’t be the best choice for every borrower, but it’s essential that every borrower know that IDR is an option,” she says.
Other student-loan servicing issues highlighted in the report:
- Servicers misleading borrowers who pay in advance. Some companies aren’t giving accurate information, as required by law, about how much interest will accrue when borrowers of private and federal loans pay ahead by at least one month.
- Problematic payment allocation for borrowers. Some servicers aren’t offering borrowers choices on how payments can be applied across multiple loans. Servicers aren’t telling some borrowers who make extra payments that they can direct those extra dollars toward higher-interest loans and thereby reduce debt faster.
- System errors drawing out the repayment process. Some federal borrowers received incorrect bills for their next-to-last payments. Since the amounts listed were less than what was required by their repayment plans, they continued to be billed for months, or even years, as interest continued to accrue.
What to do if you’re denied access to IDR
The federal loans of borrowers who apply for an income-driven repayment plan for the first time will be put on forbearance for up to 60 days while the servicer reviews the IDR applications.
Interest continues to accrue during that time, but you don’t have to make payments. If your application isn’t approved within that time, your servicer can require resumption of regular payments.
If your application isn’t approved, here’s what you can do.
1. Apply for deferment or forbearance
If you can’t afford your regular payments, deferment and forbearance can be useful tools. Both options give you a break from monthly payments, but it’s usually best to pick deferment if you qualify, because that will stop interest accruing on those subsidized loans. Under forbearance, interest will accrue on all your loans and will be capitalized, or added to your principal balance, when you enter repayment. That will increase your future payments.
2. File a complaint against your servicer
You can lodge a complaint against your loan servicer on the CFPB website or through the Department of Education. Both federal agencies will follow up with you within 15 days, and your complaint should be resolved within 60 days. Complaints reported to the CFPB also will be shared with state and federal agencies.
3. Contact the FSA Ombudsman
The Federal Student Aid Ombudsman Group acts as a liaison between borrowers and servicers to resolve problems when all other avenues have been exhausted. If your application still hasn’t been processed by your servicer, contact the group for help.
4. Reapply for IDR next year
You’ll need to apply for recertification process every year to stay on the IDR plan. If you miss the deadline, you’ll revert to the standard plan and your payments likely will go up. That also means you’d lose at least one month of qualified payments toward forgiveness. Set an online reminder for two or three months before your recertification deadline to avoid disruptions.