Millions of student-loan borrowers had their debt transferred to new companies over the past year — and it resulted in payment errors for 'hundreds of thousands of accounts,' a federal consumer watchdog says

Ayelet Sheffey
Updated ·3 min read
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  • Millions of student-loan borrowers were transferred to new companies over the past year.

  • The CFPB found those transfers resulted in significant errors on borrowers' balances.

  • Many borrowers received inaccurate bills and errors tracking their payment progress.

Last year, a number of student-loan companies announced they were ending their federal contracts, requiring millions of borrowers to be transferred to new servicers. A top federal consumer watchdog found the process has been far from seamless.

The Consumer Financial Protection Bureau (CFPB) released a report last week delving into practices by student-loan companies. It focused on the challenges that came with transferring 9 million borrowers' accounts to new servicers after major companies Granite State and PHEAA announced they would not be renewing their federal contracts to collect borrowers' student debt and manage their repayment plans.

From payment discrepancies to inaccurate billing statements, the report concluded there were errors for "hundreds of thousands" of accounts.

Here are the main findings with regards to servicer transfers:

  • Servicers had inaccurate information about borrowers' monthly payments and could not identify repayment schedules

  • The former and current servicer reported different numbers of total payments that count toward loan forgiveness progress in income-driven repayment plans

  • One servicer sent inaccurate billing statements to more than 500,000 borrowers

  • Borrowers were placed on forbearance when it wasn't the best option for them

  • Servicers were inadequately staffed to manage and implement program changes for targeted loan forgiveness programs and payment pauses.

The report noted that the current payment pause, which is set to expire in January 2023, "provides servicers and FSA (Federal Student Aid) with more time to correct transfer-related errors by making manual account adjustments, transferring supplemental account information, and correcting previous inaccurate or misleading statements."

Both lawmakers and the Education Department have scrutinized how loan companies are handling borrower transfers. After PHEAA — a major student-loan company — announced it was ending its federal servicing last year, Massachusetts Sen. Elizabeth Warren said those borrowers can "breathe a sigh of relief" because they would no longer be subjected to the company's practices like failing to track borrowers' payments and misleading them into taking on more debt than they can pay off.

And FSA Director Richard Cordray previously suggested that companies were shutting down so they would not have to adhere to higher standards the administration put in place for loan servicing.

"We have stuck to our guns," he said. "Some servicers have decided to exit the program rather than contend with these new realities."

But following the CFPB's report, it's clear that companies are still engaging in potentially bad behavior. With regards to transfers, the agency recommended that companies use "robust data mapping exercises" that include test transfers to minimize errors and correct misrepresentations, and it's directing servicers to update their systems with accurate information and improve call-center assistance for borrowers.

Meanwhile, federal loan companies are also tasked with implementing President Joe Biden's recently announced $20,000 loan forgiveness plan through an application that is set to become live in early October.

Read the original article on Business Insider