As the federal government withdraws from its role as a student loan watchdog, advocates and state-level politicians are trying to pick up the slack and rein in predatory practices by loan servicing companies.
On March 25, Assemblyman Mark Stone, D-Scotts Valley, introduced a bill promising to create a “Student Borrower Bill of Rights” that would curb abusive and deceptive business tactics that critics say are routinely deployed by the industry. The bill would also create a borrower advocate position and mandate that loan servicing companies, which interface with students on behalf of the federal government, disclose certain information about their relationship with their clients.
Stone says the bill comes on the heels of the “collapse” of the Consumer Financial Protection Bureau’s student loan section due to new federal policies. The student loan market has gone unregulated compared to other major debt markets, with detrimental effects to borrowers and the wider economy, Stone adds.
More than 4 million Californians collectively owe $134 billion on their student loans, making up just under one-tenth of the $1.5 trillion in total federal student debt. Over the past 20 years, student debt has rapidly increased, overtaking every other type of consumer debt save for mortgages.
But while many regulations govern business practices in the mortgage and auto loan markets, for example, there are almost no standards in place to protect student borrowers from abuse, says Seth Frotman, the former student loan ombudsman at the Consumer Financial Protection Bureau.
When Frotman left his job last summer, he accused the Trump administration of undermining enforcement targeting loan servicing companies that take advantage of unwitting borrowers. In November, Frotman founded the Student Borrower Protection Center, a Washington, D.C.-based nonprofit, with the aim of working with state leaders to compensate for the lapse in oversight.
One of his first major endeavors has been working with Stone to shape the pending legislation.
Millions of borrowers face “predatory practices and unscrupulous businesses who view student debt as their chance to make a quick buck,” Frotman says. “This bill would be a critical step, setting up California as a leader for the country.”
At CSU Monterey Bay, nearly half of all students receive federal loans, according to data from the U.S. Department of Education. College graduates typically leave the college with $13,750 in federal debt, with a monthly payment of $146.
The data shows, however, that about a third of CSUMB graduates do not begin paying their debts within the first three years of graduation, although interest accumulates during this time.
Frotman says many student borrowers are not properly advised about how the interest on their loan functions. Servicing companies push forbearance programs, which pause monthly payments and many borrowers, thankful for the relief, are unaware interest continues to balloon.
Even if AB 376 becomes law, it may face a courtroom challenge: Education Secretary Betsy DeVos has gone to court to block similar state measures.