U.S. students need more help dealing with loan companies

U.S. students are still largely on their own to protect themselves when they are struggling to repay their debt, despite the government's condemnation of some education loan servicers' unfair, deceptive and illegal practices.

In a report last week, the Consumer Financial Protection Bureau found one or more student loan servicers had charged illegal late fees, inflated minimum payment requirements and made illegal debt collection calls. They also misled consumers about bankruptcy protections, saying student loans were never dischargeable in bankruptcy. (They are, although they are quite difficult to win.)

But the regulator did not say which of the servicers - borrowers' main contacts when dealing with their student loans - had violated the law. Nor did it announce any enforcement actions.

Servicers not only accept borrowers' payments but also are supposed to help those facing financial setbacks to enroll in alternative payment programs, get deferments or forbearance, and modify loan terms when those options are available.

Agencies like the Consumer Financial Protection Bureau keep an eye on the companies that service student loans, but that does not always translate into practical intervention in everyday life.

Consumer advocates have long complained that servicers did not always inform borrowers, especially those with federal student loans, about their repayment options.

Federal loans offer a number of repayment plans, including income-based programs that can reduce monthly payments to less than 10 percent of the borrower's income.

Private student loans typically offer far fewer plans. The Obama administration has urged private lenders to expand their affordable repayment options to help borrowers avoid default.

"The general issues are happening on both the public and private side," said Deanne Loonin, director of the National Consumer Law Center's Student Borrower Assistance Project.

The largest servicers of federal student loans include Navient Corp, Great Lakes Educational Loan Services, Nelnet Inc and the Pennsylvania Higher Education Assistance Agency. The U.S. Department of Education also contracts with several non-profit agencies.

In May, Navient and former parent Sallie Mae agreed to pay $139 million after the U.S. Department of Justice and the Federal Deposit Insurance Corp accused them of violating the Servicemembers Civil Relief Act by overcharging active-duty troops.

The U.S. Department of Education this summer revised its contracts with servicers to strengthen incentives for providing good customer service and keeping borrowers from default.

The new financial incentives should help, but do not address servicer incompetence or poor training, Loonin said.

Borrowers still do not have the right to switch servicers, which Loonin said could spur competition, or to sue or otherwise privately enforce their rights when the government fails to act.

Difficulty getting help from servicers has spawned a legion of scam artists who promise to hook borrowers up with bogus debt relief programs in exchange for high fees. Ads and telephone pitches cite the nonexistent "Obama Forgiveness Program," while some companies charge hundreds of dollars to fill out paperwork for free government programs.

Loonin's advice for struggling borrowers is to avoid any company that charges an upfront fee and instead offers these suggestions:

1. Be proactive.

Do not expect this debt to go away, and do not wait for servicers to track you down and demand payment. "On the federal side especially, [student loan debt] can run after you forever," Loonin noted.

Contact servicers to let them know your situation and to ask about available alternatives.

2. Educate yourself.

Become familiar with alternatives so you can discuss them knowledgeably with servicer representatives. "Let them know you know there are options available, and you're more likely to get quality service," Loonin said.

Repayment options for federal loans are outlined on the U.S. Department of Education site and on the National Consumer Law Center's Student Borrower Assistance Project site, which also has suggestions for dealing with private lenders.

3. Be persistent.

If a front-line servicer employer will not or cannot help you, ask to speak to supervisor. If that does not work, contact the Federal Student Aid Ombudsman Group for help with federal loans. You also can file a complaint with the Consumer Financial Protection Bureau whether the loan is federal or private.