California May Join List of States With “Student Borrower Bill of Rights”

California may be about to become the newest in a growing number of states to have passed a “Student Borrower’s Bill of Rights.”

About 3.2 million Californians currently owe a total of $133 billion in outstanding student loan debt. Nationally, the average balance for those who owe student loans is $37,429. One out of every three Millennials owes at least some student loan debt. In 2017 alone, more than one million Americans defaulted on a student loan nationwide. That’s three times the number who lost homes to foreclosure over this period. More than half a million Californians are currently delinquent on their student loan payments.

The bill, Assembly Bill 376, was introduced into the California Legislature by Mark Stone (D-Monterey Bay).

Stone also introduced the California Student Loan Servicing Act, signed into law in 2016, which created a regulatory licensure program within the state’s Department of Business Oversight. The law gave this agency the authority over companies that service student loans in California.

“Multiple investigations have shown that loan servicers routinely lose paperwork, misapply payments, provide borrowers inaccurate information, and even steer them into more costly repayment options with virtually no accountability,” said Suzanne Martindale, senior policy counsel for Consumer Reports. Her organization co-sponsored the legislation.

Image credit: Pixabay.com

What does the Student Borrower Bill of Rights do?

Supporters say the new bill would curb abuses by student loan servicing companies. It would also help hold servicers accountable when they provide false or misleading information to borrowers or mishandle their accounts. The idea, supporters say, is to bring student loan servicing practices and requirements into line with those currently required of credit card issuers and mortgage servicers.
Among the bill’s provisions:
  • Servicers must post payments to accounts in a timely manner.
  • They must credit overpayments in the borrower’s best interest.
  • Servicers must apply partial payments to minimize negative credit reporting and late fees.
  • Borrowers are protected against credit damage and fees arising from servicer processing errors.
  • The California Department of Business Oversight will create a “report card” that will measure student loan servicing companies on performance indicators. These include default prevention, enrollment in income-driven repayment plans, and other similar metrics.
  • Servicer staff who advise military veterans, older borrowers, disabled borrowers to receive specialized training.
  • The bill would authorize a consumer who suffers damages as a result of a person’s failure to comply with these provisions to sue for up to treble damages.

What Prompted the California Student Borrower Bill of Rights?

The bill comes as a response to a Consumer Financial Protection Bureau report that found that student loan servicers were sometimes discouraging borrowers from enrolling in more affordable alternative payment plans. The CFPB also found that servicers too often failed to respond to questions and to complaints of payment processing errors. They also failed to provide sufficient information to borrowers regarding charges, fees, rates, payment plans, and benefits.
In February 2019, the United States Department of Education’s Office of Inspector General reported improper practices at each of the largest student loan servicers. The IG also criticized the Department of Education for failing to provide adequate oversight.
A 2017 audit by the U.S. Department of Education showed that student loan servicer Navient may have been placing borrowers who were struggling with student debt into higher-cost repayment plans than necessary. California is among several states that have filed suit against Navient. Between 2017 and 2019,  California along with Washington, Illinois, Massachusetts, New York, Pennsylvania, and Mississippi filed lawsuits or took enforcement actions against several student loan servicers who collectively handle more than half of the outstanding loan balances in the country. The federal Consumer Financial Protection Bureau also sued Navient in the closing days of the Obama Administration.
“For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans,” said then-CFPB Director and former Jeopardy champion Richard Cordray in a statement. “At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs. Too many borrowers paid more for their loans because Navient illegally cheated them and today’s action seeks to hold them accountable.”

The Complaint (And Navient’s Defense)

California Attorney General Xavier Becerra cited a number of abuses that Navient allegedly committed:
  • Steering borrowers toward more expensive repayment plans;
  • Failing to adequately disclose how students could attain income-driven repayment recertification;
  • Misrepresenting the order in which it would apply overpayments;
  • Misrepresenting the “present amount due” to delinquent borrowers; and
  • Failing to properly discharge the federal student loans of borrowers with a total and permanent disability.
Navient denies all wrongdoing.
“The allegations are unfounded, and the lawsuit is another attempt to blame a single servicer for the failures of the higher education system and the federal student loan program to deliver desired outcomes,” said Navient CEO Jack Remondi in a statement, adding: 

“If the parties were truly interested in addressing the real issues in higher education and student debt, they would direct their focus to:

  • Improve financial literacy of students and families and provide better information about the full cost of earning their degree and the cost of any debt incurred to finance that degree—before they enroll in college
  • Work to increase graduation rates—dropping out of school is the single largest factor in student loan defaults, and
  • Simplify the repayment programs and ease the enrollment process for these programs.

These steps are not easy and require hard work. It is, unfortunately, much easier to file a lawsuit, creating the perception that something is being done.”

Criticism

As written, the Student Borrower Bill of Rights is certainly a “feel-good” piece of legislation. Every legislator loves to vote for anything called a “Bill of Rights,” as it’s very easy to defend and trot out during campaign season. But some critics regard many of the bill’s claimed benefits as illusory or elusive.
Among the critics is Anthony Bartels, a Doctor of Veterinary Medicine, who together with his wife amassed more than $400,000 in debt. Bartels is a student debt consultant at the Veterinary Information Network in California.
“The overwhelming majority of the outstanding student loan debt in the United States is governed by contracts between the borrower and the U.S. Department of Education,” points out Bartels. “What authority does the legislation propose here that would change any of that arrangement or allow the state of California to enforce those contracts differently? I see none.”
“Educational loans are a result of paying for college,” continues Dr. Bartels. “Many colleges are located in California. What if the state required those schools to describe in detail the borrowed amounts and repayment options for the debts students are incurring to receive their education? In my experience, colleges are just as complicit in the lack of borrower-repayment understanding as the loan servicers.”
The federal government has also resisted the passage of state laws regulating student loan servicing customers. The argument is that states don’t have the authority to regulate servicers working with federal student loans. They also argue that adding further layers of state regulation adds administrative burden and cost, as well as needless complexity to a student loan serving industry that is already tough for consumers to navigate as it is.

Other states with a “student borrower’s bill of rights”

The first state to pass a “bill of rights” for student loan borrowers was Connecticut, which passed its law in 2015. The Nutmeg State’s law created a state student loan ombudsman and required all student loan servicers operating in Connecticut to register with the state. The state could then better monitor complaints and resolutions.

The law also created a data-collecting mechanism that was to provide the foundation for a student loan borrower education course.

Illinois passed one in 2017, with state legislators voting overwhelmingly to overrule a veto by Governor Bruce Rauner. According to Illinois attorney general, that law had the following effects:

  • It required servicers to properly process payments;
  • It required servicers to provide specialists to provide and explain to struggling borrowers all of their repayment options, starting with income-driven plans; and
    Inform borrowers that they may be eligible to have their loans forgiven due to a disability or a problem with the school they attended.

Maine passed their version of a borrowers’ bill of rights a few days ago.

Outlook

Prospects for passage look good: The California Senate still must approve the bill. If it passes, it would go to Gov. Gavin Newsom to be signed into law.
What to do if you’ve been wronged

Californians who believe they are victims of student loan servicer misconduct should file a complaint at www.oag.ca.gov/report with the California Attorney General’s Office. Victims may also call (800) 952-5225 or send a letter to: California Department of Justice, Public Inquiry Unit, P.O. Box 944255, Sacramento, CA 94244-2550.

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