NEW YORK (MainStreet) - Student debt collectors have been deceiving borrowers according to a new report from the Consumer Financial Protection Bureau, resulting in unfair fees and damaged credit. The violations include maximizing late fees and deceiving borrowers regarding their debt, among other deceptive practices banned under the Dodd-Frank Act.
"Students are already struggling with crushing amounts of loan debt," CFPB Director Richard Cordray said in a press release. "Student borrowers deserve better than illegal practices as they work to pay back their loans."
This week's report applies to loan servicers, companies responsible for collecting and helping graduates to structure their payments. The CFPB flagged six major issues in the industry, including:
Structuring payments to maximize penalties.
Many servicers handle multiple loans per person and consolidate them all into one account. Typically they bill just for that one lump sum every month and allocate the payment accordingly. That much is fine.
However many servicers have been taking unfair advantage of this situation. When borrowers pay less than the full monthly amount, these companies have been distributing the money proportionately across each loan, resulting in all of the loans in a borrower's account becoming delinquent. The servicer then charges a late fee for every loan in the account, maximize penalties while harming the borrower's credit.
Charging illegal late penalties during grace periods.
Most student loans come with a grace period, typically about six months after graduation. Borrowers can make payments during this time but don't have to. The CFPB discovered that some servicers have been charging late penalties to people making payments during their grace period but after the loan's standard due date. There are, of course, no late penalties for graduates making payments during their grace period regardless of when.
Lying about minimum payments.
Some servicers have claimed higher minimum payments than were actually due, inflating the amount with interest on loans still in deferment.
Providing inadequate or inaccurate tax information.
Taxpayers can deduct the interest on their student loans up to $2,500 per year but need the proper documentation to take their deductions. The CFPB discovered that many servicers have either not been sending out the necessary information or, in some case, have even "impeded borrowers from accessing this information and misrepresented information on the consumers' online account statements."
Lying about bankruptcy protection.
Discharging student loans through bankruptcy is hard but not quite impossible. Technically it's allowed when the borrower can prove to a bankruptcy judge that his or her loans represent an undue hardship. The CFPB has caught many servicers lying about this, implying or even outright telling graduates that student loans can never be discharged in bankruptcy.
This is untrue in theory, although in practice very few people have successfully proven undue hardship under this standard.
The Dodd-Frank Act, among other reforms, protects borrowers from harassment by debt collectors. Many loan servicers have been ignoring this provision, making constant calls to delinquent graduates often early in the morning and late at night.
The CFPB supervises most student loans for unfair, deceptive or abusive acts by collectors. Borrowers are advised to pay attention to their monthly paperwork, and should contact their servicer as well as the Bureau if they suspect that something's wrong.
--Written for MainStreet by Eric Reed, a freelance journalist who writes frequently on the subjects of career and travel. You can read more of his work at his website www.wanderinglawyer.com.