In a landmark move, California’s state legislature passed sweeping legislation this week to protect student loan borrowers.
Referred to as a student loan borrower “bill of rights,” the new law would establish enforceable, statewide industry standards for student loan servicers and protects student loan borrowers against unfair, deceptive, and predatory practices by servicers and lenders. The bill was previously approved by the California State Assembly; the State Senate followed suit this week, approving the bill by a 29-9 margin. The bill now heads to Governor Gavin Newsom’s desk for his signature.
California’s new rules will ban abusive student loan servicing practices such as wrongfully steering borrowers into forbearances and away from relief programs like income-driven repayment. It also creates minimum servicing standards related to the application of student loan payments and retention of key records, and would also mandate specialized customer service training for staff. Importantly, the new law creates a Student Borrower Ombudsman’s office, which would be responsible for reviewing and acting on complaints submitted by borrowers, and gathering and analyzing key data. And it establishes special protections for military personnel and their families as well as nurses, teachers, and the disabled community.
“This final vote by the state Assembly brings millions of California student loan borrowers just a signature away from having the rights and protections they need and deserve,” said Seth Frotman, Executive Director of the Student Borrower Protection Center. “For years, Governor Newsom has been a leader in taking action when others fall short. He can do that again by signing the Student Borrower Bill of Rights into law.”
“With Black and Latinx communities hit hardest by the COVID 19 crisis and its economic fallout, we are pleased that our legislature has decided to stand with the millions of student borrowers across the state, especially those who are most vulnerable,” said Kristin McGuire, Western Region Director at Young Invincibles, which supports the bill. “We are one step closer to ensuring that these protections become a reality in California. We applaud Governor Newsom’s demonstrated leadership during this crisis and urge him to sign AB376 into law immediately.”
Student loan servicing is widely viewed as problematic. Multiple state attorneys general have brought lawsuits against major federal student loan servicers alleging widespread misconduct. A new report released last month confirmed that student loan servicers continue to have substantial problems administering federal loan programs such as Public Service Loan Forgiveness. And even the U.S. Department of Education’s own inspector general found significant problems with student loan servicing, including a lack of appropriate oversight.
Critics of the bill question the ability and authority of states to regulate student loan servicers who are contracted with the federal government, citing supremacy of federal law over state law. However, several recent court decisions have affirmed the ability of states to regulate federal student loan servicers under state consumer protection statutes.