Lenders making life tough for student loan borrowers

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(MoneyWatch) The federal Consumer Financial Protection Bureau says private student loan borrowers are struggling to repay their debts.

The second annual report by the CFPB's student loan ombudsman suggests that the struggles that student loan borrowers are grappling with are similar to the difficulties that borrowers experienced during the mortgage meltdown, when the housing crisis helped trigger the biggest recession since the Great Depression.

The bureau paints a troubling picture of a lending industry that has been unresponsive to college loan borrowers. In fact, lenders have thrown up road blocks to make it more difficult and more expensive for borrowers to repay their loans, according to the CFPB.

"Recent reforms to credit card and mortgage servicing may provide clues to how the student loan servicing can work better," said Rohit Chopra, the student loan ombudsman, during a conference call Wednesday.

The report was based on an analysis of the 3,800-plus complaints that the CFPB's ombudsman received during the one-year period ending on Sept. 30. 

Private student loan problems

Here are some of the key problems facing private loan borrowers, according to the agency:

- Nearly half of all complaints were related to struggling borrowers who were seeking a loan modification or other option to reduce their monthly payment. While federal student loan borrowers enjoy a variety of loan repayment options, that is not the case with private student loans.

- Borrowers with multiple loans complained that when they made extra payments to reduce the principal of their loan with the highest interest rate, lenders failed to direct the money to the most expensive loan.

- When borrowers were only able to make a partial payment towards their loans, lenders would spread the payments in a way that would trigger the maximum late fees. 

- Consumers complained that when their loans were transferred between servicers, they experienced lost paperwork, interruptions of billing statements and other communications and processing errors that resulted in late fees.

Biggest complaints

Eighty seven percent of borrowers' complaints were directed at just eight companies, which is not surprising since the number of private lenders shrank during the recession. As you can see from the chart, Sallie Mae was the source of nearly half of the complaints.

On Wednesday the CFPB also issued a helpful advisory for borrowers. In the advisory you will see a link to a sample letter that borrowers can mail to their lenders to direct extra payments to the highest rate loans first.

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