Federal officials have received more than 3,800 complaints in the last year from borrowers of private student loans, with common problems related to payment processing and requests for loan modifications.
The complaints against lenders were documented in a report released Wednesday by the federal student loan ombudsman, Rohit Chopra, of the Consumer Financial Protection Bureau.
The complaints represent a tiny fraction of the millions of private student loans outstanding. About 13.7 million private student loans were outstanding at the end of 2011, the bureau and the Education Department estimated.
Many of the repayment problems occurred when borrowers attempted to pay off their loans early or in a certain sequence to lessen the impact of higher interest rates, Chopra said.
"The inability of lenders and servicers to initiate alternative repayment plans that would benefit both the creditor and the borrower continues to be a sign that this market functions poorly," the report said.
Chopra said in a conference call with reporters, however, that he's seeing signs that companies are showing more of a willingness to work with borrowers and he'll be tracking that closely in coming months.
Private student loans generally have higher interest rates than federal student loans and the options to re-finance them are much more limited. Private loans aren't issued as much as they were before the financial meltdown of 2008, but many borrowers still owe money on them.
The bureau estimates that for borrowers graduating at the time of the financial crisis with more than $40,000 in student loan debt, about 80 percent used private loans.
Other common problems commonly received by the ombudsman related to private student loans:
—When borrowers paid what they could afford but the payment was less than what they owed, lenders applied it in a way that maximized penalties for the borrower.
—Late fees were charged even after payments were submitted before the due date.
—Online sites didn't reflect payments made by phone or through the mail.
—Lost paper checks created some obstacles.
—Some borrowers had trouble obtaining accurate payoff information.
—Servicing interruptions after a change in servicers were reported.
Richard Hunt, president and CEO of the Consumer Bankers Association, said the report "skews the reality of today's private loan market" by relying on "sweeping characterization of the market based on 3,800 unverified complaints from 0.002 percent of customers."
The report said the most complaints were lodged against student loan giant Sallie Mae but added that wasn't a surprise because of the company's large volume of customers.
Patricia Christel, a spokeswoman for Sallie Mae, said in an email that 90 percent if its customers manage payments successfully and for others it offers assistance such as loan modifications.
"We're continually seeking ways to improve our customers' experience," she said.
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