Remember the Problems With Mortgage Defaults? They're Coming Back With Student Loans

June 12, 2014
New York Times 
student loan news

Some of the problems with student loans mimic those seen during the mortgage crisis. In both cases, University of Michigan professor Susan M. Dynarski explains, servicing companies are slow to offer loan forgiveness to struggling borrowers. And it often is unclear who even owns the underlying loans.

The Home Affordable Modification Program, launched in 2009 to keep distressed borrowers in place, aimed to enroll 4 million borrowers but reached only half a million. This is comparable to the current push for student loan servicers to restructure repayment plans. Lenders are balking, and the number of borrowers in better repayment plans is less than the number of borrowers in default or on the brink of it. According to the Consumer Financial Protection Bureau, many loan servicers are unresponsive to borrowers who want to restructure their payments.

“Robo-signing” is also making a comeback in student loans. Like mortgages, student loans are traded in a secondary credit market. Lender employees are signing off on the transfer of ownership of a large number of student loans in a single trade, often without properly verifying who actually owns them. The National Consumer Law Center reports that this creates difficulty for borrowers trying to modify their loans.

Student loan borrowers also have few ways to escape an unhelpful servicer, since these are assigned by the owner of the loan. Moreover, student loans are not erased in bankruptcy, ensuring that student lenders and servicers have a "captive customer," Dynarski writes.

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