According to the Consumer Financial Protection Bureau (CFPB), approximately 44 million Americans collectively owe more than $1.4 trillion in student loans. The Department of Education estimates that at least 8 million student loan borrowers have went at least 12 months without making a required monthly payment. At least 1.2 million of those borrowers went into default just this year. According to a recent article by the Wall Street Journal, only 37% of borrowers are currently making payments on their student loans. The remaining borrowers are either in default or in some form of forbearance program.

In addition, just last month, the CFPB released a report predicting that one-in-three rehabilitated student loan borrowers may default again on their loans within the next two years. The CFPB projects that those defaults will cost borrowers more than $125 million in interest charges.

Cause for Concern for Companies Offering Student Loan Services

These statistics are not just worrisome for consumers, but should also serve as a wake-up call for institutions of higher education, lenders, servicers, and debt collectors that operate in this area. The most obvious risk, of course, is that a significant percentage of the current outstanding loan balances will not be collected. The student loan debt could also lead to a ripple effect for consumers that impact their financial stability and impede their ability to repay other outstanding debt (e.g., mortgages, credit cards). However, that may only be the tip of the iceberg.

Consumer Lawsuits

For example, many plaintiffs’ lawyers are beginning to target companies in the student lending, servicing, and debt collection space. Class action lawsuits have been filed against several private for profit colleges and companies that have extended, bought, held, or collected on private student loans that consumers took out to attend the private colleges. Among other allegations, the lawsuits claim that the colleges and companies made misrepresentations to borrowers when the loans were extended and engaged in predatory and improper collection practices. Given the increase in student loan defaults, consumer lawsuits will likely continue against companies that have extended student loans, serviced those loans, or have attempted to collect on them.

Regulatory Action

In addition, regulators are beginning to pay much more attention to and scrutinize student lending, servicing, and debt collection activity. In fact, the CFPB’s student loan report, mentioned above, places much of the blame for swelling student loan defaults on flawed student loan programs and communication gaps in programs. In other words, the CFPB places at least some of the blame for the defaults on lenders, servicers, debt collection, and loan restructuring companies.

The CFPB has repeatedly stated that it plans to focus efforts on reforming the student loan industry. It has even initiated a number of enforcement actions related to student loan services, debt relief programs, and debt collection (see, e.g., Wells Fargo action, Bridgepoint Education, Inc., and Student Loan Processing.US). That trend will likely continue in the future. As such, companies that engage in student lending, servicing, collection, or debt restructuring should ensure that they are paying close attention to the CFPB’s student loan guidance and enforcement actions.

Bottom Line: Student loan defaults are mounting and are likely going to result in additional lawsuits and regulatory action against companies that extend student loans, provide student loan servicing, or debt collection or restructuring services. Companies that fit into those categories should begin evaluating their potential exposure and take proactive steps to address them now before action is taken by the plaintiffs’ bar or regulators.