Truth in student lending: What borrower complaints say about improving student loans
Each year, the federal government issues nearly $100 billion in student loans. Many students use the proceeds to help pay for college tuition, fees, books and living expenses. The number of people enrolled in higher education has increased over the last two decades, and the cost of college has continued to climb at roughly twice the rate of inflation. As a result, total outstanding student loans have increased significantly.
For many, student loans help unlock the future by providing access to the many personal and financial benefits that result from a degree. However, this is not the case for all student loan borrowers, especially those who do not complete their education.
Against this backdrop, we conducted an analysis of student loan borrower complaints, the drivers of these complaints and potential solutions.
Our detailed analysis reveals a clear need for better upfront information and simplification.
But first, let’s start with a brief reminder on what makes education loans so unique.
The federal student loan program serves a wide variety of students — from those pursuing vocational training to doctoral degree candidates, from young people right out of high school to older adults pursuing new skills or parents of undergraduates.
The program includes multiple loan types and more than 50 different repayment statuses. It is safe to say that the federal student loan program is the most complex consumer loan program in the world.
Federal student loans are an “entitlement” — meaning virtually any U.S. citizen attending an accredited school qualifies. There is no traditional consumer loan underwriting. For example, the government does not perform an assessment of the borrower’s ability to succeed at the education program or the borrower’s likely future ability to repay the loan. Further, for young people going to college straight from high school, student loans are often their first exposure to credit.
At Navient, we’ve used insights gathered over 40-plus years to develop tools and communication strategies to help our customers navigate what can be a complex repayment journey. These tools and communication strategies deliver amazing results: borrowers serviced by Navient default at a 35 percent lower rate than all others. We’re really proud of this track record of helping people succeed.
Still, we are constantly looking for ways to improve results and simplify the process for our customers. For example, my leadership team and I listen to customer calls, evaluate compliance reports, and review analysis of customer inquiries and complaints.
One source of feedback comes from the Consumer Financial Protection Bureau complaint portal, which captures comments on a variety of financial products, including student loans.
We analyzed each student loan customer submission and found that overwhelmingly the underlying issues concerned program rules or loan terms set by Congress or the U.S. Department of Education.
In fact, based on a review of 100 percent of the inquiries, 97 percent related to federal loan policies or disagreements with loan terms such as interest rates, not servicer error.
This finding held true last year even with the significant increase in the number of borrower inquiries to the CFPB portal, which research tells us is not surprising given the publicity surrounding the announcement of the CFPB lawsuit. (We have called the action politically driven, the allegations unfounded, and published detailed responses here.)
While some economists have cautioned against over-relying on the volume of comments submitted through the CFPB complaint portal as a measure of servicing quality, we still evaluate and act on the input we receive from our customers whether complaints are about federal program policies or servicer error.
We respond to each individual inquiry, and we drill deeper into borrowers’ underlying experiences so we can help improve customer experience and outcomes.
The most common topic relates to the balance due on the loan. Some questions are driven by the design of the loan program or the terms of the loan; such as how interest is calculated or how payments are allocated between principal and interest. Unlike most consumer loans where repayment begins immediately, student loan payments are usually postponed while the borrower is in school, often for several years. For most federal loans, interest accrues during this period and is added to the principal balance when the loan enters repayment. This increases the balance owed above the original amount borrowed — and can lead to some confusion. In other cases, borrowers may not understand why a portion of their monthly payment is first applied to outstanding interest before principal.
In response, we have developed a series of free financial literacy videos on a variety of topics including how interest is calculated. We have also advocated for federal programs that would help students and their families understand the full cost of earning their degree and the salary range required to support any borrowing (plus applicable interest) they incurred. These common-sense changes could help improve financial literacy and help prevent over-borrowing.
Perhaps surprisingly, the largest contributor to student loan defaults, however, is not over-borrowing. It’s not graduating. Despite the perception that student loan defaults are driven by excessive debt, in fact, two-thirds of all defaults are from those who borrowed less than $10,000. Only 4 percent of defaults are from those who borrowed more than $40,000.
While this may sound counter-intuitive, it’s the result of not completing. The student has incurred the debt, but did not gain the benefit of the degree.
Unfortunately, a staggering 41 percent of students who enroll in a bachelor’s degree program don’t finish within six years. Helping more students graduate would lead to substantially fewer defaults.
The second largest topic of inquiries relates to confusion around repayment plans. Simplifying repayment programs and encouraging contact with one’s servicer would also help reduce delinquency rates and defaults. In our experience, 90 percent of borrowers in default did not respond to our outreach to them over the 12 months of missed payments leading to default. Encouraging borrowers to contact their servicer before they miss a payment should be a priority.
Another unique aspect of the federal loan program are repayment options based on income. These programs can reduce the monthly payment owed to a level that’s affordable — in many cases even as low as zero. Unfortunately, the application form is lengthy — 10 pages long — and the process is cumbersome.
The combination of challenges here means that only 27 percent of past-due borrowers whom we have pre-qualified for a lower monthly payment successfully returned the application in 60 days — despite multiple reminders. While we have limited ability to change the process for federal loans we service for the Department of Education, we used this information and our expertise to develop a streamlined and assisted process for federal loans we do own. This simplified solution nearly tripled the successful application return rate for borrowers who are delinquent to 71 percent within 10 days.
These examples, solutions and recommendations are driven by identifying the root causes of customer pain points.
It’s certainly easier to point fingers, but without an understanding of the drivers of borrower difficulty it’s hard to implement solutions that truly improve customer experience and outcomes.
Numerous studies have consistently shown that a college degree leads to increased employment opportunities and higher income. Given the high cost to attend college, student loans are often the only solution for families to foot the bill. Policymakers, consumer advocates, colleges and servicers should be working together to help students and families to make informed choices, to borrow wisely and to make the repayment process easier to navigate. It’s time we made this happen.
Note: This article was updated in April 2019.