Mark Stone positions California to set new student loan standards.

Even a cursory spin around the internet leads to some of the horror stories told by student loan borrowers. There’s the old bait-and-switch, wherein borrowers keep sending their payments into one company, not knowing the loan had been sold to another company because they were never told. There’s the fine-print scheme, in which borrowers have the right to pay early but are never told, so they keep amassing interest on their debt (or they borrow with the help of a parent co-signer who then has their wages garnished). Then there are the counseling schemes, wherein a company tells a borrower they can help them manage their debt for a $1,000 fee, yet the advice they offer ends up being no help at all.

“There is so much debt and not a lot of regulation and student loan servicers don’t treat borrowers well once they take control of that debt,” says California Assemblyman Mark Stone, D-Scotts Valley. “It can become a cash turn for the servicers without students understanding what they got into.”

In California, as in the rest of the country, the student loan industry is a lot like the Wild West – an unregulated wilderness where most anything goes. Stone’s quest is to bring transparency to the student loan industry and some measure of protection to borrowers.

Despite fierce opposition, Stone’s bill, AB 2251 – the Student Loan Servicing Act – was signed into law by Gov. Jerry Brown last year. The topic is fresh again because, as a compromise, the act won’t launch until July 1, 2018, and the Legislature is considering any final changes to its language. It’s also fresh because the Trump administration and Betsy DeVos, Trump’s Secretary of Education, announced their intention to rewrite rules enacted by Barack Obama intended to protect student borrowers.

Those rules are Borrower Defense to Repaying, which allows students to have their debt forgiven if a school used illegal or deceptive practices to encourage students to borrow, and the Gainful Employment rule, which helps ensure students earn sufficient income after graduation to repay their loans. According to Forbes.com, DeVos said the rule change will help students who are victims of fraud (although she didn’t explain how); meanwhile, critics say the rule changes will benefit the for-profit school industry.

In California, there are nearly 4.2 million student loan borrowers carrying a total student loan debt of $1.2 billion. According to the Consumer Finance Protection Bureau, there are no consistent federal standards for student loan servicing. Further, the CFPB reports that many student borrowers struggle to make monthly payments, while being unaware of affordable repayment options and federal loan forgiveness programs. And errors on the part of the loan servicers can create obstacles for borrowers trying to comply.

“The Department of Education was in the middle of looking at a number of regulations and they were developing a portal and the servicers would be licensed by the feds,” Stone says. “Then [the president] put in place someone who doesn’t care about students. State regulation is the only way servicers will be held accountable.”

AB 2251 will create a licensing program within the state Department of Business Oversight to license student loan servicers that are not banks or credit unions. The program gives the DBO authority to give, deny, suspend or revoke licenses, and investigate servicers’ compliance.

Stone says it’s the most comprehensive program on student loan servicers in the country. Mortgage companies, banking and credit card companies are all highly regulated, but nobody was doing anything to hold these servicers accountable.

“We started off trying to do a bill of rights for student loans and quickly realized it’s way beyond that. This will help us get a better sense of what to do about it,” he says.

As California goes through its process, the eyes of the nation are on it. Since introducing the bill, a dozen states have followed suit. And they have watched as loan giants like Navient and lobbyists have battled the bill.

“We did not intend this, but we are setting the standard nationwide,” Stone says. “We have to take it very seriously.” In the worst-case scenario, even if opponents manage to gut or kill the law, a program will still be administered by the DBO.

MARY DUAN writes The Local Spin for the Weekly. Reach her at mary@mcweekly.com