Update from the CFPB Student Loan Ombudsman - Consumerfinance

May 16, 2017 - vulnerable student loan borrowers from accessing affordable repayment plans (i.e. income-drive repayment or IDR)—increasing costs to taxpayers and failing to set up borrowers for success over the long term.3. Based on the data submitted in response to our request, the CFPB has made the following.
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May 16, 2017

Update from the CFPB Student Loan Ombudsman Transitioning from default to an income-driven repayment plan

May 16, 2017 Contemporaneous with the publication of the 2016 Annual Report of the CFPB Student Loan Ombudsman, the Bureau sent a letter seeking information from several student loan servicers. This letter requested a range of qualitative and quantitative information about practices for servicing the student loan accounts of economically vulnerable borrowers as they transition from default into an income-driven repayment plan (the “Default-to-IDR transition”).1 In response, servicers that collectively handle accounts for approximately half of all student loan borrowers provided information to the Bureau. The following report provides the public with a preliminary update on the information provided, including a closer look at data related to the performance of certain previously defaulted student loan borrowers. Despite the growing scale of our student loan default problem and the high stakes for borrowers and taxpayers, this new data suggests that this process is failing the borrowers who need it most. Seth Frotman Student Loan Ombudsman Consumer Financial Protection Bureau

See Consumer Financial Protection Bureau, 2016 Annual Report of the CFPB Student Loan Ombudsman (Oct. 2016), https://www.consumerfinance.gov/data-research/research-reports/2016-annual-report-cfpb-student-loanombudsman/. 1

A Closer Look at the “Default-to-IDR Transition” As noted above, the Bureau sent a voluntary request for information to several student loan servicers, seeking information about practices for servicing the student loan accounts of borrowers as they transition from default into an income-driven repayment plan. Servicers collectively handling accounts for more than 20 million student loan borrowers provided a range of qualitative and quantitative information in response to the Bureau’s request.2 This input provides additional support for the observations made in the Bureau’s October 2016 report— hundreds of thousands of struggling student loan borrowers will end up back in default over the next two years, paying more than $125 million in unnecessary interest charges on the way. A combination of problematic servicing practices and government programs can prevent the most vulnerable student loan borrowers from accessing affordable repayment plans (i.e. income-drive repayment or IDR)—increasing costs to taxpayers and failing to set up borrowers for success over the long term.3 Based on the data submitted in response to our request, the CFPB has made the following preliminary observations. Of borrowers about whom a servicer provided information about loan performance: 

The vast majority (greater than 90 percent) of borrowers who rehabilitated one or more defaulted loans were not enrolled and making IDR payments within the first nine months after “curing” a default. As the Bureau’s October 2016 report discussed in detail, for most borrowers exiting default, the range of widely-

Responses include qualitative responses from three student loan servicers collectively servicing loans for more than 20 million borrowers with Direct Loans, ED-held FFELP loans, and privately held (commercial) FFELP loans. In addition, two servicers provided quantitative responses to the Bureau, providing summary data about borrower performance for more than 600,000 unique borrowers recently curing at least one previously-defaulted federal student loan. 2

The following general observations reflect data provided by two servicers collectively servicing borrowers on behalf of the Department of Education and private holders of legacy guaranteed federal loans (FFELP). Information in this section about borrowers with previously-defaulted federal student loans is not based on random sample, the population may not be representative of all borrowers with previously-defaulted federal student loans, and readers should not infer statistical significance or causality, base