By Ben Kaufman | July 6, 2021
There are more than 4 million student loan borrowers in California currently owing on well over $148 billion in student loan debt. This burden has ripple effects across every area of borrowers’ lives, blocking them from saving for retirement, buying homes, forming families, starting small businesses, and much more. Worse, the data make clear that California borrowers are struggling. Estimates from the Federal Reserve Bank of New York indicate that more than 390,000 borrowers owing over $11 billion in student loan debt are 90 or more days past due on these obligations.
For the most vulnerable student loan borrowers—those who have fallen into default—the pain of student loan debt is particularly acute. Default can cause borrowers to struggle long-term to find a job, rent a home, or maintain a needed professional license.
Adding insult to injury, student loan borrowers who default often face abusive collection efforts, including finding themselves the target of massive additional fees and extensive harassment. These efforts include wage garnishment and other mechanisms for throwing already struggling borrowers’ lives into further peril.
Hundreds of Thousands of California Private Student Loan Borrowers are at Risk of Abusive Collection Tactics
Private student loans carry unique risks for California borrowers, especially for those borrowers who have fallen behind in repayment. Private student loans are an often-overlooked area of the broader student loan market, but they are hotbed of abuse and borrower distress.
In California, 650,000 borrowers owe more than $10 billion in these debts. Private student loan borrowers have fewer protections than borrowers in almost any other area of consumer credit, including federal student loan borrowers, and they often have little recourse when private student loan debt is unaffordable.
Further, while data are scarce, national trends indicate that the burden of private student loan debt falls heaviest on borrowers of color, making them most likely to face the consequences of default. In particular, our own research indicates that Black borrowers with private student loans are nearly four times more likely to fall behind on their loans due to financial hardship (24 percent) than their white peers (7 percent).
Moreover, research from the University of California, Irvine (UCI) underscores how egregiously private student loan borrowers in California are targeted by abusive actors when they default and face collection efforts. According to researchers at UCI, 3,850 debt collection cases filed in California since 2015 are attributable to one creditor alone: the National Collegiate Student Loan Trusts (NCSLT). NCSLT has been caught deploying many of the worst collection practices last seen in the 2008 financial crisis against borrowers, including illegally “robo-signing” court documents. Our research shows that NCSLT focuses these tactics against communities of color nationwide.
More generally, UCI’s findings indicate that private student loan borrowers in the vast majority of debt collection cases are not represented by a lawyer, leaving them vulnerable to one-sided court proceedings that lead to unfair outcomes. In particular, UCI discovered that 90 percent of defendants in a sample of California private student loan lawsuits in 2018 were unrepresented, 94 percent were unrepresented in 2019, and 89 percent were unrepresented in 2020.
Student Debt Default Reaches Every Corner of California and Weighs Heaviest on Communities of Color
Credit panel data recently released by the Urban Institute illustrates just how broadly across California the pain of student debt collection is felt. In particular, our analysis of this data shows that far from being an “urban” problem borne by millennials irresponsibly spending on avocado toast, the student debt crisis spans geographies from metropolitan centers to the most rural corners of the state, all while uniquely harming borrowers of color.
Our analysis of the credit panel data indicates the following:
- The share of borrowers in collections in the ten California counties with the lowest average household incomes is more than twice as high as the share of borrowers in collections in the ten California counties with the highest average household incomes. Across the ten highest-income California counties, an average of only 7 percent of borrowers are in collections [1] on defaulted student loans. Meanwhile, in the ten lowest-income California counties, fully 18 percent of student loan borrowers on average are in collections on defaulted loans. This finding underscores that the consequences of debt collection are likely to be most prevalent for borrowers who can already afford them the least in areas across California.
Note: Excludes counties likely to face data limitations due to small sample size.
- The counties where the greatest proportion of student loan borrowers face collection efforts shatter the narrative that student debt is an “urban” problem. Student debt harms low-income areas across California, but this phenomenon is not limited to big cities. Instead, among the ten California counties with the highest proportion of borrowers in collections, almost all fall in the rural or otherwise sparsely populated areas in the far northern reaches of the state. Only two of these ten high-collections counties are designated by the U.S. Department of Agriculture as being urban counties.[2] By comparison, eight of the ten counties with the lowest proportion of borrowers in collections are designated as urban counties by USDA.
Note: Excludes counties likely to face data limitations due to small sample size.
- Across the state, and even in counties where fewer borrowers are in collections, there is significant student loan borrower distress in communities of color. The data we analyzed includes detail on both the proportion of student loan borrowers with debt in collections in majority-white communities in each county and the proportion of student loan borrowers with debt in collections in communities of color within the same counties.[3]
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- In analyzing this data, a stark pattern becomes clear: even in more affluent counties where the proportion of borrowers in collections is (as discussed above) relatively low, communities of color within those counties witness heightened rates of borrowers falling into collections. In particular, in the ten California counties where average income is highest and where data are available on rates of borrowers entering collections both in majority-white communities and communities of color, the share of borrowers in collections in majority-minority areas is, on average, 2.9 percentage-points higher than the share of borrowers in collections in majority-white areas in the same counties.
Note: The list of ten highest-income counties in California used here excludes Marin, Napa, Placer, and El Dorado counties due to data limitations.
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- This pattern of low overall rates of student loan borrowers entering collections in a given county masking stark disparities between majority-minority and majority-white areas of the same county spans across the state. Overall, the share of borrowers in collections in majority-minority areas in California counties is 3.1 percentage-points higher on average than the share of borrowers in collections in majority-white areas in the same counties. This spread ranges as high as 9 percentage-points.
Note: Excludes counties likely to face data limitations due to small sample size.
While the data covers both federal and private student loan borrowers who are in collections, borrowers facing collections on private student loans face unique obstacles and risks. And as our analysis of the data makes clear, the wide range of dangers present for private student loan borrowers in collections—from predatory lawsuits to overwhelming added fees—affects borrowers in all corners of the state, with the weight of the problem falling heaviest on borrowers of color.
California Must Once Again Stand Up for the Most Vulnerable Student Loan Borrowers
California has historically been a leader in the fight to protect student loan borrowers. In 2016, California passed the Student Loan Servicing Act, creating key protections for borrowers in repayment and vital accountability standards for industry. The state followed up in 2020 with a landmark Student Borrower Bill of Rights, adding further layers of privately enforceable prohibitions on unfair or deceptive practices by student loan companies.
But while California’s efforts have been vital, legislation has so far left out a key segment of the market: borrowers in default on student loans originated and held by private corporations.
Right now, the 650,000 California student loan borrowers who owe more than $10 billion in private student loan debt remain vulnerable to a shocking range of harm and abuse if they fall behind.
California legislators can change this. Today, the Judiciary Committee of the California State Senate will consider legislation aimed at closing the gap in protections for borrowers in default on federal student loans and private student loans. Introduced by Assemblyman Stone and coauthored by Senators Hertzberg, Limón, Wieckowski, and Wiener, the Private Student Loan Collections Reform Act will offer borrowers in default on private student loans basic but vital protections against abuses including lies and misrepresentations by debt collectors.
Private student loan borrowers in California cannot afford to wait any longer for protection. It’s time for the Golden State to once again stand up for the most vulnerable student loan borrowers.
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Ben Kaufman is the Head of Investigations and a Senior Policy Advisor at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked as a Director’s Financial Analyst on issues related to student lending.
[1] The Urban Institute describes how it measures debt in collections with the following: “Debt in collections includes past-due credit lines that have been closed and charged-off on the creditor’s books as well as unpaid bills reported to the credit bureaus that the creditor is attempting to collect. For example, credit card accounts enter collections status once they are 180 days past due.”
[2] The present analysis considers counties with an Urban Influence code of 3 or lower as urban.
[3] Regarding the delineation between majority-white communities and communities of color within each county, the Urban Institute explains: “Specifically, the majority-white communities are based on credit records for people who live in zip codes where most residents are white (at least 60 percent of the population is white), and communities of color values are based on credit records for people who live in zip codes where most residents are people of color (at least 60 percent of the population is African American, Hispanic, Asian or Pacific Islander, American Indian or Alaska Native, another race other than white, or multiracial).”