Joe Giddens/Press Association via AP Images
The number of applications for the administration’s new income-driven repayment program that have not been processed for more than 30 days increased from about 20,000 in August to 451,344 in October.
Back in June of last year, my colleague David Dayen predicted that ending the pandemic-era student loan repayment pause would be a logistical disaster. In theory, the Biden administration has cobbled together a student loan scheme that should not be too burdensome for anyone. It indeed would radically change how higher education is financed, if it can be sustained.
The problem is the dependence on mostly private companies to actually service the loans correctly. These companies have a mile-long track record of errors—wrong names, wrong addresses, wrong payments, you name it. Worse, the pandemic and the student loan repayment pause created enormous chaos in the servicer system.
A new report from the Consumer Financial Protection Bureau (CFPB) shows that Dayen was correct. Agency examiners have found that borrowers “are facing long hold times when trying to reach their servicer by phone, significant delays in servicers’ processing of their applications for income-driven repayment, and inaccurate billing statements.”
Specifically, average time spent on hold when calling servicers for help increased from 12 minutes in August to 73 minutes in October. As a result, the percentage of callers hanging up before speaking to a representative increased from 17 percent to 47 percent over the same period. One caller reportedly spent almost nine and a half hours on hold trying to reach someone.
Most importantly, the number of applications for the administration’s new income-driven repayment (IDR) program that have not been processed for more than 30 days increased from about 20,000 in August to 451,344 in October:
Source: Consumer Financial Protection Bureau
This matters because IDR is supposed to be the core of the new student loan system. The basic idea is simple enough: People make payments based on their income for a set period of time, and if anything is left after that, the remainder is forgiven. The amounts vary: Those making less than $30,000 don’t have to pay anything, while those making above that mark pay 5 percent of their income. Loan balances of $12,000 or less will be forgiven after ten years, while each additional $1,000 will add a year of repayment, up to a maximum of 20 years for undergrad loans and 25 years for graduate ones.
To be clear, all this is dramatically more generous than how IDR used to work. The problem is that people’s applications must be processed to get into IDR, and then servicers need to keep track of enrollees’ income, other household members, addresses, and so on. And now we learn that far too often, they’re screwing it up.
It all adds up to payment errors. The CFPB notes that servicers have billed people prematurely, sent bills to borrowers who should be in forbearance, and inflated payments by using incorrect poverty data, screwing up household income or size, or not accounting for spousal loan balances.
Now, the CFPB doesn’t yet say what fraction of loans might be subject to these problems. But we do know that about 60 percent of borrowers (or about 15 million of them) have resumed payments, and if the skyrocketing number of problems is any judge, it’s probably a sizable chunk. The Education Department has now found over 3 million billing mistakes since the resumption of payments last October, with another 758,000 announced last Friday. This fits with Wall Street Journal reporting from December with much anecdotal testimony about billing and payment issues.
In some ways, this is rather baffling. Collecting and processing student loan payments ought to be a relatively simple administrative task. But as Dayen demonstrated, the servicing industry has been in a state of utter chaos for years now—many companies, including the largest one, Navient, quit the business during the pandemic. Nearly 24 million borrowers had their servicer changed over the past few years, in many cases to companies they had never heard of. Even before the pandemic, these companies were notoriously incompetent, in part because since they are paid with a flat fee per loan, they have an incentive to cut down on servicing costs as much as possible.
Indeed, the problems with private servicers bear considerable resemblance to the problems with mortgage servicers after the Great Recession, who also screwed up payments, paperwork, and everything else, leading to thousands of illegal foreclosures.
For all the complexity, the task of servicing student loans is not even close to the paperwork headaches faced by, say, the IRS. If the government wants an administrative task done, better to pony up the necessary cash, follow the example of the Faroe Islands, and build the necessary capacity itself rather than rely on an ever-shifting suite of private companies with bad incentives who are plainly incompetent.
