Why You Can’t Always Trust Your Federal Student Loan Servicer

Federal student loan debtors are stuck between a real rock and a hard place when it comes to getting real help and factual information from the student loan servicers of their loans. The people on the front line of servicers often do not have the right information or the right process in place to provide factual help and assistance. So who can a consumer trust?

And this is a real tragedy because the general consumer advocacy advice is student loan debtors should not pay for help with their loans because they can do all those things for free. And while that is factually true, it only works when the student loan servicing companies know what they are doing and provide accurate advice.

On the flip side, my criticism of student loan assistance companies has primarily been the sales people at those companies are quick to sell help but not always the right help needed. Many of these companies are fronted by commissioned sales people who want to make the sale and not necessarily the right sale.

So what is a federal student loan debtor to do? Good question. Personally I suggest people contact my friend and independent debt coach Damon Day but he’s just one guy who works hard to provide customized solutions.

The reality is there is no perfect one-size fits-all solution for every student so crafting an individual approach is critical. The student loan debtors who are the most at risk of falling into the wrong solution are people who just want to find the first student loan assistance salesperson or believe every student loan servicer customer service person. In this confusing landscape, debtors MUST participate in making sure the solution is right for them.

The most authoritative website for federal student loan information is StudentAid.gov. That’s the official site for loan help from the Department of Education. But I’ve got my gripes with that site as well. While authoritative, it often lacks the backup or detail that fully explains the programs. And even the Department of Education is horrible to get specific information out of in unusual circumstances.

It’s a murky landscape for getting factual, accurate, detailed, and timely help for federal student loan problems.

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CFPB Identifies Servicer Problems

The Consumer Financial Protection Bureau has released a report in which they identify key student loan servicing issues they found. Now granted these don’t apply to every student loan servicer but it has been enough of an issue to confuse or frustrate a significantly large number of student loan debtors. At least if you judge the impact based on the volume of complaints the CFPB received.

Here are the issues the CFPB has identified.

Incorrect Income Driven Repayment Plan Information

“During one or more recent exams of student loan servicers, examiners determined that servicers were engaging in the unfair practice of denying, or failing to approve, IDR [Income Driven Repayment] applications that should have been approved on a regular basis. When servicers fail to approve valid IDR applications, borrowers can be injured by having to make higher payments, losing months that would count towards loan forgiveness, or being subjected to unnecessary interest capitalization.”

Payment Application Problems

“In one or more recent exams, Bureau examiners cited servicers for the unfair practice of failing to provide an effective choice on how payments should be allocated among multiple loans where the lack of choice can cause a financial detriment to consumers. One or more servicers failed to provide an effective choice by, for example, not giving borrowers the ability to allocate payments to individual loans in certain circumstances, not effectively disclosing that borrowers have the ability to provide payment instructions, or not effectively disclosing important information (like the allocation methodology used when instructions are not provided).

Examiners have found that failing to provide borrowers with an effective choice on how to allocate payments can result in financial detriment when a servicer allocates payments proportionally among all loans absent payment instructions from the borrower. For payments that exceed a borrower’s monthly payment, borrowers may wish to allocate funds to loans with higher interest rates instead of a default proportional allocation. For payments that are lower than a borrower’s monthly payment, borrowers may wish to allocate funds in a manner that minimizes late fees, interest accrual, or the severity of delinquency, or in other manners, rather than proportionally allocating the underpayment.”

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Payment Ahead Issues

“On one or more occasions, Supervision cited a student loan servicer for a deceptive practice relating to how the servicer describes what the consumer owes and when. Supervision concluded that one or more servicers’ billing statements could have misled reasonable borrowers to believe additional payments during or after a paid-ahead period would be applied largely to principal. The bills noted that $0.00 was due in months that the borrower was paid ahead, but misled consumers as to how much interest would accrue or had accrued, and how that would affect the application of consumers’ payments when the borrower began making payments again.”

You can read the full report here.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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