The Consumer Financial Protection Bureau is warning loan servicers to stop collecting private student loans that were discharged by bankruptcy courts, the agency announced Thursday.
The agency found that some servicers were continuing to collect payments on loans after bankruptcy proceedings had concluded, in violation of federal laws, and many borrowers ended up paying thousands of dollars they did not owe. The agency directed those servicers to return the money.
“When a court orders the discharge of a loan, lenders and servicers should not treat this as a suggestion,” CFPB director Rohit Chopra said in a news release. “The CFPB has found that some servicers are ignoring bankruptcy court orders. The student loan servicing industry should ensure that their collection practices are compliant with the law.”
The agency said that student loan servicers failed to differentiate between the loans that could be discharged in a standard bankruptcy proceeding and those that can’t. Typically, borrowers have to show during bankruptcy that they would suffer “undue hardship” if the student loans are not discharged—a higher bar than for other types of debt. Not all types of private student loans are subject to that standard.
“The CFPB expects servicers to proactively identify student loans that are discharged via standard bankruptcy orders, permanently cease collections, and refund any consumers who have been affected by unlawful collections in the past,” the agency said in the release.
The Student Borrower Protection Center drew attention to the issue in a January 2022 report and applauded the agency’s decision.
“After years of unfair, deceptive, and shamelessly predatory behavior by some of the largest financial companies in the world, the nation’s top consumer watchdog has finally stepped in to protect student loan borrowers,” SBPC counsel Amber Saddler said in a statement. “The entire student loan industry should take notice—the days of cheating borrowers out of their legal right to bankruptcy are over.”