Opinion

The federal government won’t protect student borrowers. California must step up

Student debt is on the rise in the U.S.

The student lending market has grown to more than $1 trillion in outstanding debt. By using data and expert interviews, the Consumer Financial Protection Bureau gives context to consumers considering taking on student loans.
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The student lending market has grown to more than $1 trillion in outstanding debt. By using data and expert interviews, the Consumer Financial Protection Bureau gives context to consumers considering taking on student loans.

California should act to protect millions of its residents by being the first state in the country to adopt a law requiring student loan companies to treat borrowers fairly and giving borrowers the right to hold these companies accountable when they fail to meet basic servicing standards.

The Student Borrower Bill of RightsAssembly Bill 376 by Mark Stone, D-Monterey Bay – would create a comprehensive set of rights for people holding student debt.

Student loan debt is enormous. Nationally, 44 million Americans owe an astounding $1.5 trillion in debt. In California, there are more than 3.7 million individuals with student loan debt. Cumulatively, they owe $141.9 billion. The average indebtedness for those who owe student loans is $37,429. One in three millennials owes student loan debt.

Abusive practices by those seeking to collect unpaid debts, including student loans, have been extensively documented. As many state and federal investigations have shown, student loan servicers routinely lose paperwork, misapply payments, give inaccurate information and even steer borrowers into repayment options that add to the overall cost of their loans. Even worse, they cause them to fall behind on payments and slide toward default.

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Unfortunately, the federal government, which had begun to take essential action in this area, has retreated. Secretary of Education Betsy DeVos cancelled plans to increase servicing standards and consumer protections for those holding student loans. Mick Mulvaney, when he was director of the Consumer Financial Protection Bureau, closed the office investigating student loan abuses and fraud. Like in so many areas, the Trump administration’s anti-regulatory efforts have been all about protecting business at the expense of people.

In 2016, California enacted the Student Loan Servicing Act with AB 2251, also by Stone. This bill created a regulatory licensure program within the state’s Department of Business Oversight and gave this agency the authority to oversee companies that service student loans in California. But AB 2251 was adopted based on the assumption that there would be substantial federal regulation of abusive practices by debt collectors. Without this, protection of student loan borrowers must come from state governments.

The proposed Student Borrower Bill of Rights would end abusive practices by the student loan industry and give borrowers new tools to take action if they are victims of industry abuse. Student loan borrowers deserve the same rights as homeowners with mortgages and consumers with credit card debt.

AB 376 will require companies to handle student loan payments in borrowers’ best interests while also ensuring that servicers give accurate information to borrowers asking for help. The bill provides for the “timely posting, processing, and crediting of student loan payments within certain time frames, applying overpayments consistent with the best interest of a student loan borrower, applying partial payments to minimize late fees and negative credit reporting, maintaining accurate records, timely processing of paperwork, and diligently overseeing service providers.”

The bill also will protect borrowers from fees and credit damage due to mistakes made by loan servicing companies.

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Erwin Chemerinsky

Additionally, AB 376 would create special protections for vulnerable populations. The bill requires student loan companies to train their staff to understand these rights and creates strong new protections to prevent companies from misleading military borrowers, deceiving teachers and public service workers, cheating borrowers with disabilities and defrauding older Americans.

AB 376 would create a new “student borrower advocate” in California to help individuals who run into trouble. The student borrower advocate will serve as a voice for California student borrowers in Sacramento and in Washington.

The bill will also create greater transparency from the student loan industry. Under AB 376, the Department of Business Oversight will create a new “student loan industry report card” to measure the relative effectiveness of different companies at preventing loan defaults, enrolling borrowers in affordable payment options and meeting borrowers’ needs.

Abusive collection practices by debt collectors have been regulated in most areas, but not for student loans. AB 376 is an essential step in that direction and hopefully will be a model for states around the country to follow. It is a bill that should be quickly passed by the California state Legislature and signed by Gov. Gavin Newsom.

Erwin Chemerinsky is dean and professor of law at the UC Berkeley School of Law. He can be contacted at echemerinsky@law.berkeley.edu.

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