Consumer bureau notes problems repaying student loans

“People were trapped in a broken system,” he said. “I’m concerned that the same chaos and confusion we saw in the mortgage market may be repeating itself in the student loan market.”

The report found that student loan servicers sometimes spread out borrowers’ payments in order to maximize profits.

For instance, a borrower trying to pay more than their monthly bill may find the payment applied to all their loans, not just those with the highest interest rates that they would prefer to pay off first. 

Those without the ability to pay all their loan bills one month may have their payments spread across multiple loans serviced by the same company, so that a late fee is charged on each loan, instead of making sure minimum payments are made on some loans to reduce those fees.

Borrowers also reported problems when their loans were transferred between different debt collectors, leaving them confused and sometimes on the hook for more charges.

Chopra told reporters that reforms to the mortgage as well as credit card markets “may provide clues” on ways to fix the system for paying back student loans.

“Repaying a student loan should be simple,” CFPB Director Richard Cordray said in a statement. “When servicers process payments to maximize fees and penalties, they undermine the trust of their customers.”

Financial institutions opposed the reports findings, since it focused only on private loans, not federal loans.

In a statement, the head of the Consumer Bankers Association (CBA), Richard Hunt, said that the report “skews the reality of today’s private loan market.”

“CBA believes the Bureau should help all consumers especially when federal loan portfolios carry a 14.7 percent three-year default rate,” he added. “It appears these borrowers are under great duress since federal loans, unlike private loans, are funded without determining the borrower’s ability to repay.”

-- This report was updated at 6:29 p.m.