The student loan crisis is starting to feel a lot like the housing crisis of the last decade, warns Illinois State Attorney General Lisa Madigan — a swelling economic disaster with millions of fragile borrowers unable to get timely help or good advice. If that seems like an overstatement of the situation to you, consider this: A stunning 1-in-3 student loan borrowers are late on loan payments, and several studies show struggling borrowers often don’t know about programs designed to lower their monthly payments.
Unwilling to wait for reforms at the federal level, Illinois and other states are taking matters into their own hands by passing new consumer protection laws called the Student Loan Borrower Bill of Rights.
“There’s been almost no oversight of the student loan industry,” said Madigan, adding that student borrower complaints to her office have skyrocketed right along with the total outstanding student loan burden, which now sits at $1.4 trillion, owed by about 44 million Americans.
Madigan helped craft her state’s legislation, which was inspired in part by a recent lawsuit filed by Illinois against Navient, the nation’s largest servicer. The measure recently advanced out of a Senate committee there.
Another Looming Financial Crisis?
“This is work we really didn’t think would ever come our way. But it resembles the mortgage foreclosure crisis. There are many of the same problems, like poor customer service, lost paperwork,” she said. “It’s very clear there is a need for enhanced consumer protections and clear servicing standards.”
The Illinois lawsuit accuses Navient of steering struggling borrowers into forbearance rather than providing them with adequate information about cheaper repayment plans. (Navient says the allegations are “unfounded.”) But other research shows borrowers clearly aren’t getting the message about available options. In 2015, a study by the GAO found that 51% of people making their student loan payments would have qualified for lower payments, but only 13% of the borrowers knew to ask for the lower payments.
Since good advice can be hard to get, borrowers are “increasingly turning elsewhere for help, including to scam artists who exploit desperate borrowers, much like they did during the mortgage crisis,” Madigan’s office said in announcing its legislative victory.
Enter the Student Loan Bill of Rights Laws
Were the Illinois law to pass, the state would join Connecticut and Washington, D.C., which recently enacted Student Loan Bill of Rights laws. Several other states are weighing similar legislation.
The new laws generally require loan servicers to obtain a license in each state, which gives state watchdogs additional oversight capabilities. The laws also create an ombudsman who can receive and act on complaints from residents, and critically, states set requirements that good advice be shared with borrowers.
States are jumping in because prospects for a national student loan bill of rights, introduced by Sens. Dick Durbin and Elizabeth Warren in the last Congress, are unlikely with the current leadership in Washington.
Obama-Era Protections Killed
Also adding urgency are criticisms that Betsy DeVos, the new head of the Department of Education, has rescinded Obama-era rules that opponents say would have helped protect borrowers. On May 8, 21 state attorneys general sent an open letter to DeVos criticizing her rollback of the new rules.
“DeVos has removed those protections and prioritized the profits of servicers over helping struggling student loan borrowers,” Madigan said. “The need for Illinois to put in place a Bill of Rights is because there won’t necessarily be protections at the federal level.”
The Department of Education didn’t immediately respond to a request for comment.
Should Illinois and other states succeed in passing such laws, they would all be in the odd position of trying to regulate federal student loans and firms working under contracts with the federal Department of Education.
It’s an open question, however, if states can really regulate federal loan programs. Supporters of the bills say states have the right to protect their residents from fraud and abuse, but it’s possible that loan servicers could ultimately challenge their authority in court.
Navient directed questions for this story to the Student Loan Servicing Alliance, which criticized what it said could become a patchwork of laws.
“Servicers help student loan borrowers repay their education loans, and avoid the negative consequences of serious delinquency and default,” said Winfield P Crigler, executive director. “This work is best achieved in a clear regulatory environment. The U.S. Department of Education, which is the lender for more than 90% of new student loans, already uses its regulatory and procurement powers to supervise federal student loan servicers. We believe state regulation of student loan servicing will conflict with federal policies and requirements, and will be a detriment to the very borrowers we intend to help.”
But supporters point out that state-level consumer protection laws can be more effective.
State-Level Consumer Protections Could Help
“Consumer protection at the state level fills critical gaps when the Feds are asleep at the switch. Many states are frustrated that the Education Department has been too cozy with the student loan industry, so they’re looking to protect borrowers in their state,” said Rohit Chopra, senior fellow at the Consumer Federation of America.
States are taking other steps, too. California is considering a law that would cap private student loan debt garnishment at 15% of wages, for example. Several other states have enacted programs making it easier for student loan holders to refinance.
Chris Lindstrom of the Public Interest Research Group welcomes the flurry of state-level activity. Federally, the job falls to the Consumer Financial Protection Bureau, which she fears may lose its authority or influence soon.
“It’s onerous (regulating) the student loan space, especially when looking at the scope of the problem. It’s good to have more eyeballs on what’s going on,” she said. “Then there’s also the whole hedging bets situation, since nobody knows what the next Congress will mean for the CFPB.”
Lindstrom said the state-level ombudsman would be the most tangible and helpful change for borrowers.
“Having a place where you can go to complain and having that complaint count,” she said.
State-level laws would apply only to state residents: An Ohio resident who studied at the University of Chicago would get no relief from the Illinois bill, for example. On the other hand, an Ohio State graduate living in Illinois would be protected.
Ultimately, however if a critical mass of states pass and enforce new rules, the impact could ultimately be nationwide.
“If a slew of large states enact similar legislation, this could be the medicine the industry needs to treat borrowers fairly nationwide,” Chopra said. “We saw a similar approach a decade ago with toxic mortgage lending, where states looked to protect homeowners through new state laws.”
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