Student Loan Servicing Companies and the Need for Regulation

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Student loan debt has soared to 1.2 trillion dollars, making it the second largest type of consumer debt in the United States. It’s a large industry that has generally gone unregulated, even in the wake of the mortgage crisis. However, as more student loan borrowers struggled to keep on top of their payments and mounting debt, the Consumer Financial Protection Bureau (CFPB) began investigating student loan servicing companies. Recently, the CFPB released a report that highlighted complaints against student loan servicing companies, along with some recommendations.

As part of their investigation, the CFPB asked consumers about their experiences with student loan servicing companies. They received more than 30,000 responses that helped point out some of the problems with student loan servicing companies. Comments showed that private and federal loan borrowers complained about practices that made repayment more difficult, even causing some to default. Other complaints included: misapplied payments, lost paperwork, difficulty getting in contact with a representative, and difficulty finding suitable, affordable repayment options.

What Are Student Loan Servicing Companies


Student loan servicing companies are not in the business of actually loaning money. They’re a middleman between the borrower and the loaner. For student loans, the borrower may be the student themselves or a parent, grandparent or other guardian. The “loaner” is generally the government or a private bank. Some students have a mix of private and federal loans, as there are borrowing limits on the latter.

Borrowers generally have no say in who manages their loan. The lender either selects their preferred servicing company or a random servicing company. This is the company a borrower will be interfacing with for about 10 years as they pay down their student loans—possibly longer—and they have no say in the selection.

Why It Matters


Student loan servicing companies are entrusted with collecting a lot of money. For students who receive federal loans, a student loan servicing company is chosen for them by the government, essentially providing an endorsement of their services. If these student loan servicing companies are breaking the law or just providing poor service and making it difficult for students to pay their loans in a timely fashion, that reflects poorly on the government and federal financial aid.

If the companies are in fact mishandling federal funds, and not just doing their jobs poorly, it could have major ramifications for the future of student loans and loan servicing. Student loan servicing companies are not well regulated and the numerous complaints against them seem to indicate that some form of regulation is necessary to ensure that students aren’t being taken advantage of.

What Can Be Done


As part of their report, the CFPB made recommendations to make student loan servicing companies better, reduce the number defaults and create better outcomes. These recommendations include: more transparency in regards to payment types and outcomes, timely dispersal of information to borrowers, and industry-wide regulation with clear standards that will allow servicers to be held accountable as necessary.

While these recommendations, if enacted, may go a long way towards providing a better borrowing atmosphere for students and their parents, it will take policy makers enacting legislation to really make a difference. Student loan servicers like Navient consistently receive low scores by the industry. Navient is one of the largest student loan servicing companies handling the majority of Sallie Mae issued student loans. Although some student loan servicing companies may attempt to act upon some of the CFPB recommendations and improve their services, there will be no consistency until lawmakers and policy makers decide to introduce legislation to create a uniform standard.

While student loan servicing companies are not solely to blame for an increase in student debt and student loan defaults, implementing regulations may help to better serve up to 70% of borrowers, allowing them to pay off their loans in a more manageable, affordable manner. Simple fixes like clear, timely information dispersal may go a long way towards cutting back of defaults, which is good for both borrowers and lenders.

Thanks to the rising cost of education, the amount of student loan debt in the United States will continue to increase. That means more of the population will be dealing with paying off student loans and interfacing with student loan servicing companies. In order for student loan servicing companies to begin to change their practices, those who are most affected should consider letting their state senators know about how student loan servicing companies regulation would help them meet their loan obligations. It is in the best interest of the nation to reform the student loan system and create a safer atmosphere for borrowers and future students.


Photo courtesy of: BlueOlive

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Kayla is a mid-20s single girl living in the Midwest, USA. She is focused on paying off her consumer and student loans, while simplifying her life and closet. You can join her on her journey at or follow her on Twitter @shoeaholicnomor.

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