How the Government Benefits from Loan Servicing Incompetence

Michael Lux Student Loan Blog, Student Loans 0 Comments

As taxpayers we would like to think that the federal government looks out for our needs.  As student loan borrowers, we would expect that the federal government would treat us fairly and ethically when it comes to student loan repayment.  Unfortunately, there are a number of different ways that federal loan servicers can make errors that mean more money for the government and for the loans servicer.

Borrowers of federal student loans should understand these issues so that they can manage their debt as efficiently as possible and avoid potential pitfalls.

Lousy Service Costs Less than Good Service

This concept is pretty simple.  Good training costs money.  Top employees cost money.  Adequate staffing costs money.

Federal loan servicers all have contracts with the government.  The less they spend fulfilling their contractual obligations, the more profit they make.

While there are federal loan servicing employees who are both very knowledgeable and helpful, borrowers need to know that this is not always the case.  Sometimes customer service representatives don’t know the answer and this can be very frustrating, but it happens.  Things get really ugly when a loan servicer gives out inaccurate information.  Borrowers have little to no remedy when they get bad information and rely upon it.  Thus, they need to check and double-check everything that they are told and rely upon.

Bad Information means more income

We have seen numerous instances where borrowers believed they were on the proper repayment plan to be eligible for public service student loan forgiveness.  In many cases, after years of payments, borrowers have learned the hard way that their payments did not count towards forgiveness.

This is one of those circumstances where “I’m sorry” just doesn’t cut it.  This misled borrowers made payments relying upon the accuracy of the information they were given.  Because the information was wrong, years of payments, and thousands of dollars do not count towards student loan forgiveness.  Presently, there are not any procedures in place to rectify these major errors, even when the borrowers have been paying more than what they would have owed on an eligible plan.

Processing time equals Profit

Last year President Obama unveiled the newest repayment plan, Revised Pay As You Earn.  The new plan promised to help millions of borrowers qualify for lower payments.

While the new plan is indeed a huge asset to many borrowers, the implantation left much to be desired.

Here at the Student Loan Sherpa, we saw firsthand how one servicer did not meet processing deadlines and instead placed borrowers in “administrative forbearances” that were never requested.  As a result of these forbearances, the government makes extra money in two ways.  First, by not requiring payments for a particular month or two, interest continues to accrue and the balance is larger than what it was at the beginning of the forbearance.  Secondly, for borrowers working towards any of the forgiveness programs, these months don’t count towards forgiveness and extend the amount of time the borrower is in debt to the government.

Bottom Line

Federal student loans servicers play by a set of rules that are not to the benefit of borrowers.  Until borrowers can consistently get accurate information and quality service, the federal government will continue to bring student loan profits directly attributable to their incompetence.

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