It's no secret that many Americans struggle to make payments on their student loans. One in four student loan borrowers are in default or having difficulties staying current on their loans, according to the Consumer Financial Protection Bureau. But the problem often has as much to do with a flawed system as it does with the inability of borrowers to meet their debt obligations. 

Senator Elizabeth Warren, Democrat of Massachusetts, says one big problem is that the private companies that manage federal student loans aren't doing their job adequately. Warren is now calling on the Department of Education to institute major reforms to fix the loan servicing system. 

Loan servicers play a critical role for borrowers. They manage their accounts, process payments and are the first point of contact for borrowers who aren’t keeping up with payments or could qualify for alternative payment programs.

For borrowers, the proposed reforms can’t come soon enough. When the Consumer Financial Protection Bureau launched a public inquiry into loan servicing problems last May, it received more than 30,000 comments and complaints about servicers

Borrowers said servicers often lost paperwork or misapplied payments, made it difficult to fix errors, and failed to help borrowers in distress access affordable payment options to avoid default.

One reason for the problems is that there is little oversight over how well loan servicers do their jobs. There is also little incentive for them to help borrowers resolve their problems, says Suzanne Martindale, a staff attorney at Consumers Union, the policy and advocacy arm of Consumer Reports. 

That's because most servicers are paid a flat monthly fee for every account they manage but there is no penalty if a borrower defaults.

And if a borrower stops paying, the loan servicers aren’t required to help the borrower make good on the payment. Instead, the account is sent to a debt collection agency.

“We shouldn't be running the student loan program to create profits for private companies. We should run it for students,” Senator Warren said in a press release announcing the reforms. 

Change is Needed

Warren called for a raft of changes, including:

  • Creating a Department of Education portal for personalized information about student loans, including repayment options.
  • Punishing student loan companies that violate their contracts.
  • Changing financial incentives, such as compensating companies on how well they guide borrowers into suitable repayment programs and giving more loans to servicers with the best performance.
  • Collecting and making public data on loan servicer performance, including default rates.
  • Developing a complaint resolution process and better training standards for employees of loan servicing companies.

Consumers Union has long advocated for loan servicer reforms such as those Warren is calling for, including requirements for servicers to actively help borrowers manage their loans, a single portal for borrowers to get information about their loans, a robust complaint tracking system and better data reporting so policy makers and consumers know where the problems are in the system.

Watch Out for Scams

Since many borrowers can’t get the help they need from loan servicing companies, consumers often turn to student debt “relief” companies—a bad move that can lead to even greater problems. Debt relief companies target borrowers promising help and often charge steep prices for services that borrowers could do on their own for free, like requesting a different repayment plan, says Martindale.

They can also be in the business of scamming borrowers. This week, the CFPB accused Student Aid Institute of tricking borrowers into paying fees for free federal loan benefits. The organization misrepresented itself by claiming that it was affiliated with the Department of Education, according to the CFPB.  The CFPB ordered the company to halt its business, pay a penalty and permanently barred the company from operating as a debt relief organization. 

Where to Get Help

If you’re a borrower and need advice on loan repayment options, you can turn to the CFPB’s repay student debt tool. It walks you through repayment options and information on how to request a lower monthly payment. You can also file a complaint about problems with a servicer or a debt relief company with the CFPB.

The Obama administration has also been calling for major reforms that will help borrowers. Last March, it proposed a Student Bill of Rights, which included a call for borrowers to be able to easily access affordable repayment plans, high quality customer service and reliable information. 

While some changes require congressional action, others have moved forward. Among them is a new income-driven repayment plan, the Revised Pay As You Earn (REPAYE) Plan, which Consumers Union helped develop as part of a special committee.

Correction: An earlier version of this article inaccurately reported that the government does not penalize a loan servicer if a borrower fails to stay current with loan repayments. However, if a borrower falls behind on payments, the loan servicer is paid less for that account. The government does not impose a penalty if a borrower defaults on a payment.