Some student-loan borrowers with private debt are being forced to make payments they don't owe, a federal watchdog says
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- The CFPB released a report analyzing complaints from private and federal student-loan borrowers.
- It found that private borrowers were receiving incorrect information from their lenders on relief.
- Specifically, they were incorrectly told they were ineligible for bankruptcy relief.
Some lenders might be discouraging private student-loan borrowers from receiving relief to which they're entitled.
The Consumer Financial Protection Bureau's education loan ombudsman Robert Cameron released the annual report on student-loan complaints from September 1, 2022 through August 31, 2023. In that time period, 9,284 student-loan borrowers submitted complaints — 6,934 of which were related to federal loans and 2,350 of which were related to private loans.
The current private student-loan portfolio in the US has about $132 billion in outstanding debt, which is 8% of the total outstanding student debt. The CFPB found that lenders are misleading some of those borrowers and keeping some of them in repayment for debt they do not owe.
For example, while private borrowers cannot access relief through borrower defense to repayment, which allows federal borrowers to submit claims for relief if they believe they were defrauded by their school, the Federal Trade Commission's Holder Rule allows private borrowers to bring a claim against their school to their lender. However, some borrowers told the CFPB their lenders ignored their claims, keeping them in repayment.
Additionally, the report said lenders were giving borrowers "incorrect information" when it came to relief through bankruptcy. While some private loans are not eligible to be discharged in court, certain types of private loans — like those made to attend programs that might not have had access to federal student aid — are covered in a general discharge order.
However, borrowers complained that lenders told them neither federal or private student loans can be discharged via bankruptcy unless they meet a financial hardship standard.
One borrower said: "I filed bankruptcy in December 2021, which was discharged in February 2022. The loan was removed from my credit report but then was put back on and into repayment in April of 2022. They are still trying to collect on this loan, even though it was discharged. I have tried to talk to [my servicer] but they keep telling me that it's not eligible for discharge with no explanation as to why not."
The CFPB released a report in March shedding light on the misleading guidance lenders give to private borrowers on bankruptcy. It found that some lenders were violating consumer protection laws by resuming collections on debt a court already approved for discharge, leading some borrowers to pay "thousands of dollars on discharged debts."
"Since the consumers could not control the servicers' actions, consumers could not reasonably avoid the injury," the report said.
As Insider previously reported, private student-loan borrowers are more vulnerable than federal borrowers because they do not have the same avenues for federal debt relief and repayment, and it's harder to regulate private lenders that can set their own terms.
The CFPB's ombudsman Cameron is recommending that regulators and law enforcement examine whether private lenders properly disclose terms to borrowers, including stating upfront whether a borrower holds loans that could be eligible for bankruptcy discharge.
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