StudentLoans_iStockLast week, the Consumer Financial Protection Bureau (CFPB) released its annual CFPB Student Loan Ombudsman Report on Private Student Loans.  The report documents numerous pitfalls with the way that private student loan servicers process payments. Because of these problems, borrowers sometimes cannot figure out who to pay, end up paying more late fees, encounter difficulty when trying to pay off loans early, and more.

The Private Student Loan Industry

In previous decades, most students got federal student loans (loans made or guaranteed by the federal government). But because of increased tuition rates and other changing factors, more and more students are forced to take out student loans from private banks and lenders. Those loans, sometimes called private label loans, have interest rates that are much higher than those of federal loans, less favorable loan terms, and are not eligible for the flexible federal repayment programs for borrowers in financial distress. (Learn about the disadvantages of private student loans.)

According to the CFPB, of those borrowers graduating at the time of the financial crisis with more than $40,000 in student loan debt, a whopping 81% had loans from private student loan lenders. According to the CFPB, the private student loan market was worth $6 billion in 2011. The industry often targets students attending for-profit schools. In 2008, 42% of students at for-profit institutions took out private loans, compared to just 14% at public universities.

Less Than Stellar Payment Processing Practices

The CFPB report was based on 3,800 complaints made through its online complaint system between October 1, 2012 and September 30, 2013. In analyzing those complaints, the CFPB noted many pitfalls with the way that private student loan servicers process payments, including:

  • Losing checks and then charging borrowers late fees on the account.
  • Processing excess funds in order to maximize interest rates for the servicer, to the detriment of the borrower.
  • Processing partial payments so as to maximize late fees for the borrower.
  • Failing to provide accurate payoff information for those borrowers seeking to repay their loans early.
  • Failing to notify borrowers when their accounts are transferred to a new servicer, resulting in frustration, late fees, and risk of delinquency.

You can get details on these incompetent and unfair processes in Nolo’s article Repaying Private Student Loans: Watch Out for These Pitfalls.

CFPB Provides Advice and Help

Along with the report, the CFPB issued a consumer advisory, Stop Getting Sidetracked by Your Student Loan Servicer, which provides a sample letter for borrowers to send to their servicers when processing certain types of payments. The advisory also reminds consumers that if they have trouble with a private student loan lender, they can file a complaint with the CFPB at www.consumerfinance.gov/complaint.