States Taking Reigns: Washington’s New Law for Student Loan Providers
Washington state has just joined a handful of states (including California) in applying specified regulations to student loan providers and requiring them to be licensed by the state. This law will pressure providers to proactively share more company information with borrowers. It is a response to complaints from student loan borrowers who feel poorly and, often, wrongly treated by loan providers.
When the act of contacting your loan provider does not help sort out an issue, who do you turn to? What if you suspect your provider has wronged you – how can you verify? Well, the new law also outlines the plan for providing free-to-the borrower advocates. These advocates can serve as the go-to people for higher education loan issues and confusion. The state plans to create an advocate office, which will require funding to get started. Eventually, though, the funding will come from the new licensing fees that will be paid by student loan providers.
Federal and Student Loan Providers’ Opposition
This young and hopeful policy is already being actively contested. At the core of the legal quibbles taken up by the Department of Education is the fact that student loan providers are currently deemed good or bad by federal law. This system provides a sort of simplicity: Every state shares regulations for student loan providers. Giving each state more control will complicate the system. Such complication will cause student loan borrowers unneeded confusion (say student loan providers displeased with being licensed by the state).
The Student Loan Servicing Alliance, a group that opposes the new regulations, suggests as an alternative that there be more pre-loan-borrowing counseling. Ideally, students would then have enough knowledge about loan operations to make better choices and recognize scams. Using this as the only solution, however, takes the pressure off of loan providers to be more honest and careful. If they can say, “The borrower should already know,” then they can potentially (and often already do) get away with guiding their borrowers down more expensive paths than necessary. For example, some student loan providers are accused of pushing their borrowers into forbearance rather than helping them sign up for an income-based payment method – an issue Katherine Long addresses in The Seattle Times. In this scenario, the borrower pays more than was perhaps necessary, in the long run.
A Deeper Look at Federal Opposition
To better understand those positioning themselves against giving individual states control over student loan providers, you can read from the Federal Register volume 83, issue number 48. It became evident to me the more I read from this that the core of the legal response does not directly address the core of the issue at hand. Washington state has realized federal law does not do enough. “Hello there,” Washington seems to say. “Borrowers in our state are not being treated as well as they should be. Loan providers could help more if we set better standards for them. And we can set up extra help to educate and advise the borrowers, too.” But the federal legality side seems to say, “Hey guys, this is our job and we will be in charge of holding loan providers accountable.” So Washington identified a problem and gave a solution, but the Department of Education says they do not want this solution. The problem is (or should be) under their control.
So there is a reluctance to delegate regulation control to individual states. This is understandable to an extent. But when a system clearly falls short of its aim, the problem probably should not be swept under a lawsuit that denies change without fixing the need that inspired the change.
The Department of Education’s lawsuit (which is likely but not certain to happen, according to The Washington Post) would address the new measures being taken by Washington state’s new law. Thus far I have been sympathizing with this law. This is partly because I find the reasons for creating the law compelling (borrowers being misguided by servicers they trust trusted); but it is also because I found the rebuttal given by the Student Loan Servicing Alliance to be so unsympathetic. After acknowledging student loan borrower’s complaints, the SLSA said: “[H]owever, none of the complaints allege that servicers violated federal law” – which reminds me of a kid who pulls a mean prank on their sibling, quickly defending their actions with, “Dad never said not to do it.” And then repeating the prank, and the father not changing the rules to defend the kid being hurt.
I acknowledge that problems are almost sure to arise with this law. Implementing new policies that involve extensive setup and many trying-and-failing experiences certainly will be expensive and result in many people (and businesses) having to learn new protocols and routines. Instead of stymying the new changes, however, perhaps the Department of Education could reply to it with a helping hand. So, imagine Washington’s new law being like a kind aunt stepping in to help her niece or nephew from a mischievous sibling. On the one hand, this intervention could have been accomplished by the father or mother. But since the parent has not sufficiently protected the child in this instance (the federal law has not protected the vulnerable student loan borrower) – and since the parent does not seem interested or able to make new, effective rules – maybe delegating this area to the aunt (the state) will be the right and effective next step to improving student loan borrower’s debt repayment journey.