Federal agency: Student loan company errors could 'pose serious risks' to borrowers, the economy

When student loan servicers make errors by cutting corners or sidestepping the law, it can "pose serious risks to individuals and the economy," said Consumer Financial Protection Bureau Director Rohit Chopra.

Chopra's comments are part of an "issue spotlight" from the Bureau released Friday, outlining a number of problems borrowers faced when their payments resumed in October after the over three-year long pandemic-era pause expired.

Borrowers experienced long hold times with their servicers, significant delays in the processing of their repayment applications and inaccurate and untimely billing statements, the Bureau found.

The U.S. Department of Education also announced on Friday that it would withhold payments to three student loan servicers as part of its efforts to hold the companies accountable. (The federal government contracts with different companies to service its student loans, and pays the servicers a total of more than $1 billion a year to do so, according to higher education expert Mark Kantrowitz.)

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Aidvantage, EdFinancial and Nelnet "all failed to meet contractual obligations to send timely billing statements to a combined total of 758,000 borrowers for the first month of repayment," the Department reported.

As a result, it is withholding $2 million from Aidvantage, $161,000 from EdFinancial and $13,000 from Nelnet. These figures are based on the number of borrowers impacted by each company's errors.

"Today's actions make clear that the Biden-Harris Administration will not give student loan servicers a free pass for poor performance and missteps that jeopardize borrowers," U.S. Secretary of Education Miguel Cardona said in a statement.

Affected borrowers will be placed into an administrative forbearance until the issues are resolved, the Department said. In the meantime, they shouldn't owe any payments and will not face interest charges.

The U.S. Department of Education held back $7.2 million from Mohela in October for failing to send timely billing statements to 2.5 million borrowers. As a result of Mohela's errors, more than 800,000 borrowers became delinquent on their loans, the Department said.

Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers, blamed the errors on a lack of resources and notice from the government.

"Time and effort spent by Federal Student Aid and the CFPB on the press strategy would be better put to use in trying to solve the actual problems by coordinating on advocating for more resources and executing better operational planning by the government," Buchanan said.

Outstanding education debt in the U.S. exceeds $1.7 trillion, burdening Americans more than credit card or auto debt. The average loan balance at graduation has tripled since the '90s, to $30,000 from $10,000. Around 7% of student loan borrowers are now more than $100,000 in debt.