A January 2017 lawsuit by the federal Consumer Financial Protection Bureau against Navient, the nation’s third-largest student loan company, sparked an audit by the U.S. Department of Education’s Student Aid division that reached a disturbing conclusion: the company purposefully steered student borrowers toward higher-cost repayment options, levying an estimated $4 billion in added interest costs on graduates from 2010 to 2015.
Many student loan servicing companies such as Navient offer borrowers an option known as “forbearance,” a practice that allows customers facing financial stress the ability to delay payment on their loans for up to three years. The trouble is that interest on the outstanding balance continues to pile up, making the total cost of the loan much more expensive in the long term — and claims are that Navient did not make this clear to its customers. Allegations also include that borrowers were pushed toward higher-cost forbearance plans and steered away from taking advantage of public service loan forgiveness programs. Such practices have serious impacts on student borrowers: a study by the federal Government Accountability Office calculated that the typical student carrying $30,000 in debt who uses a three-year forbearance plan adds more than $6,700 in interest — nearly one-fourth of the entire principal balance and more than 13 percent of the average starting salary of a college graduate — to the cost of the loan.
So what can be done to prevent such predatory lending and student loan repayment practices? The federal Department of Education believes that it has no jurisdiction in this matter or others like it. States, however, are starting to take action.
What can be done to prevent such predatory lending and student loan repayment practices? The federal Department of Education believes that it has no jurisdiction in this matter or others like it. States, however, are starting to take action.
Several states have enacted laws establishing a student borrower’s “bill of rights,” attempting to ensure that appropriate and comprehensive consumer protections exist for student borrowers (a previous Rockefeller Institute analysis noted several states where legislatures had introduced such bills.) These initiatives often institute regulations on the required content, transparency, and distribution of information regarding student loan repayment terms, and some establish a formal state ombudsman office for student loans to help ensure full and clear information is available to all borrowers. Many of these laws also add some teeth to the measure by establishing punitive actions the state can take in instances of violations by lenders. For example:
Connecticut: Borrower’s Bill of Rights. Connecticut became the first state to pass a borrower’s bill of rights in 2015. The bill established a student loan ombudsman in the Connecticut Department of Banking to review, attempt to resolve, and report on student loan complaints. The new ombudsman also was charged with disseminating information to policymakers and the public about problems being realized with student lending and developing a comprehensive “student loan borrower education course.” Licensing requirements for student loan servicers were instituted, too, along with a prohibition on misleading or defrauding borrowers.
Illinois: Student Loan Servicing Rights Act. A Student Loan Bill of Rights in Illinois will go into effect on December 31, 2018. The law creates a Student Loan Ombudsman in the Attorney General’s Office and requires student loan servicers to obtain a license to operate in the state. Protections for student loan borrowers include that loan servicers are prohibited from making misleading statements and required to properly process payments. Specialists are made available to explain to struggling borrowers all of their repayment options, starting with income-driven plans, and to inform borrowers that they may be eligible to have their loans forgiven due to a disability or a problem with the school they attended.
California: Student Loan Servicing Act. California’s Student Loan Servicing Act was first enacted in September 2016, and was overhauled three years later in September 2018. Businesses engaged in servicing student loans in California are subject to licensing requirements and must meet various qualifications. The law also allows applications to be completed through the Nationwide Multistate Licensing System & Registry, providing consistency across all servicers.
Michigan: Student Loan Delinquency Counseling Pilot Program. In 2017, Michigan initiated a student loan delinquency counseling pilot program to help borrowers who are delinquent on their federal student loans. The program provides free one-on-one counseling to develop a repayment plan that will return the borrower to good standing and help with continued successful repayment. In addition, borrowers are provided with financial education to assist in the creation of a budget and to better understand their credit score.
Oklahoma: Private Student Loan Transparency and Improvement Act. This law established regulations on private loan lenders to student borrowers in the state, requiring that prior to issuing a loan the lender must include estimated balances, estimated repayment time, anticipated changing interest rates, and the method for identifying additional charges, among other transparency requirements.
Washington: Student Loan Bill of Rights. Effective June 7, 2018, Washington became the latest state to enact regulatory and statutory protections for student loan borrowers. The law imposed licensure requirements on student loan servicers and created a state Advocate (similar to the ombudsman in other states) to handle student lending complaints, disperse information to stakeholders, and to monitor and analyze student borrowing in the state. The Advocate also must establish a comprehensive borrower education course by October 2020.
New York State has not been sitting still on this issue. In his 2018 State of the State Address, Governor Andrew Cuomo proposed a host of protections for student borrowers. Governor Cuomo’s proposal included the creation of an ombudsman at the state Department of Financial Services that would be student borrowers’ advocate and “help resolve student complaints, mediate disputes and educate borrowers about student loans.” Financial counseling for borrowers in default also would be available. Colleges would be required to provide easy-to-understand information about repayment amounts, terms, and obligations. Much of this agenda was established by the Department of Financial Services through its Student Protection Unit and Student Lending Resource Center.
Additional protections for student borrowers could be enacted in New York. Creating a uniform code of conduct for student debt consultants as well as instituting licensing requirements for student loan servicers, for example, is an area in which New York could take action.
Also, while twenty states suspend an individual’s professional license or driver’s license for defaulting on student loan repayments, Governor Cuomo sought to protect student borrowers against such actions and included a prohibition on these actions a part of his recommendations.
These accomplishments made notable progress on the issue, building on less-successful earlier attempts. In 2007, for example, New York enacted the Student Lending, Accountability, Transparency and Enforcement (SLATE) Act, calling for regulations to establish a code of conduct for lending institutions and colleges and universities regarding the marketing of student loans. The State Education Department’s Office of Higher Education did not enact the proposed regulations, however, citing a lack of funding accompanying the mandate.
Additional protections for student borrowers could be enacted. Creating a uniform code of conduct for student debt consultants as well as instituting licensing requirements for student loan servicers, for example, is an area in which New York could take action. Concerns within the lender community about providing consistency in regulations and licensing from state to state is valid, particularly given that many student borrowers move between states, and could be considered by policymakers when establishing these new requirements. An up-to-date, comprehensive registry of student loan servicers also could be established.
Carrying student loan debt is burden enough. Borrowers should not have to also worry about predatory lending practices and unscrupulous loan repayment policies.
 Federal Student Loans: Actions Needed to Improve Oversight of Schools’ Default Rates, GAO-18-163 (Washington, DC: U.S. Government Accountability Office, April 2018), https://www.gao.gov/products/GAO-18-163; NACE Staff, “Average Starting Salary for Class of 2016 Held Steady,” National Association of Colleges and Employers, July 19, 2017, https://www.naceweb.org/job-market/compensation/average-starting-salary-for-class-of-2016-held-steady/
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Understanding the actual size, scope, and impact of student debt in New York is critically important if issues are to be properly addressed and solutions appropriately tailored to provide the most effective relief.
What can be done to prevent predatory lending and student loan repayment practices? The federal Department of Education believes that it has no jurisdiction in this matter or others like it. States, however, are starting to take action.
Many states offer programs through which families can prepay college expenses at current tuition rates, so that when it comes time for students to enroll in college the financial burden will be less and the need to take out any student loan could even disappear entirely.
Borrowers would do well to first understand one thing that student loan refinancing companies have in common: they intend to make money off of servicing student loans.