The System is Broken: What More Than a Decade of Litigation Reveals About the State of the Student Loan Industry
By Mike Pierce and Tamara Cesaretti | December 3, 2019
For more than a decade, student loan borrowers, law enforcement officials, regulators, and government watchdogs have raised alarms about widespread abuses by the student loan companies paid to service and collect on more than $1.6 trillion in private and federal student loans. Loan servicing companies include those with big government contracts like Nelnet and PHEAA, along with the big banks that dominate the private student loan industry, including Wells Fargo and Discover. Across the marketplace, borrowers have fallen victim to tricks and traps that have cost them billions of dollars and left them deeper in debt.
Because of these abuses, a plethora of government and private actors have sued the companies involved in amplifying the student debt crisis. In order to provide a one-stop summary of the student loan industry’s history as a target for consumer protection litigation, we have compiled an inventory of more than two dozen individual claims brought against student loan companies over the past decade, including the government enforcement actions that have grabbed headlines and private lawsuits that may have gone unnoticed.Claims-Against-Student-Loan-Servicers_12.19
In many of these cases, borrowers’ fell victim to illegal acts that violated state and federal prohibitions against unfair, deceptive, or abusive acts or practices—broadly applicable consumer laws that set a floor for all companies engaged in commerce. While the student loan industry has repeatedly demonstrated that it is unable to do business in a fair and honest manner, these cases also reveal how the absence of enforceable, industry-specific standards for common practices has left borrowers’ vulnerable to a staggering range of abuses.
For example, across the industry, student loan companies have been accused of:
- Mishandling Borrowers’ Payments. Student loan companies, including some of the biggest banks, have been the target of government enforcement actions to halt predatory payment processing schemes that charged borrowers illegal late fees, damaged borrowers’ credit, and increased the costs of borrowers’ loans over the long-term. Because there is no federal standard that dictates how companies must process borrowers’ payments, consumers continue to struggle with shoddy, sub-standard, and often illegal payment processing tactics employed by loan companies.
- Mismanaging Protections for Borrowers in Distress. Student loan borrowers have been routinely and systematically denied access to protections intended to offer lower monthly payments and access to loan forgiveness, costing consumers more than $4 billion in unnecessary interest charges nationwide. This allegation sits at the center of lawsuits filed by the Consumer Financial Protection Bureau, and the states of Illinois, Washington, Pennsylvania, California, and Mississippi against student loan giant Navient Corporation, which allegedly steered more than 1.5 million borrowers into more expensive repayment options. Lawsuits reveal that these breakdowns are not limited to one company, suggesting that the absence of specific, enforceable standards to govern borrowers’ interactions with loan companies has driven industry to cut corners and trample on borrowers’ right to affordable loan payments.
- Ignoring Borrowers’ Pleas for Help. Borrowers often contact student loan companies for assistance, seeking help to stay on track. Government enforcement actions and private litigation reveal that when borrowers contact customer service representatives, they are often presented with incorrect, misleading, or intentionally deceptive information about their rights, in some cases leading borrowers to forfeit eligibility for benefits and protections, including loan forgiveness under the embattled Public Service Loan Forgiveness program.
- Preying on Vulnerable Borrowers. Older borrowers, disabled borrowers, including service-disabled veterans, and borrowers serving in the armed forces have all faced abuses at the hands of the student loan industry. Even though these borrowers have protections and rights designed to ease the burden of student debt, lawsuits have alleged that companies created roadblocks that denied borrowers’ rights and damaged their credit, increasing the burden of student debt on the most vulnerable borrowers.
Taken together, these lawsuits and other enforcement actions illustrate the breadth of the breakdowns plaguing the student loan industry and make a compelling case for immediate action by policymakers to set higher standards for conduct by these large private-sector financial services firms.
Mike Pierce is the Policy Director and Managing Counsel at the Student Borrower Protection Center. He is an attorney, advocate, and former senior regulator who joined SBPC after more than a decade fighting for student loan borrowers’ rights on Capitol Hill and at the Consumer Financial Protection Bureau.
Tamara Cesaretti is a Counsel at the Student Borrower Protection Center. She joined the SBPC after developing a passion for ending the student debt crisis while working as a civil rights policy advocate at the intersection of economic justice and educational opportunities.