By Seth Frotman | December 9, 2019
For too long, student loan borrowers have been trapped in a broken system plagued by predatory actors. Although student loans are the second-largest class of consumer debt, borrowers are armed with fewer rights and protections than consumers with mortgages, credit cards, or nearly any other type of debt.
This week, Congress is slated to take a major step toward ending this broken system.
The U.S. House Financial Services Committee is expected to advance a package of sweeping new legislation designed to protect borrowers from the rampant abuses plaguing the student loan system. This package of bills would create new industry-wide rules of the road to better protect the millions of borrowers across the $1.6 trillion student loan market.
The need for federal action is clear: borrowers deserve protections that can be independently enforced by state and federal regulators and by individual borrowers themselves. Decades of mismanagement at the Department of Education (ED) shows that the agency cannot be trusted to put borrowers’ interests first. State and federal enforcement officials have brought more than two dozen consumer protection lawsuits against student finance companies over the past decade—evidence of widespread abuses by big banks like Discover and Wells Fargo and specialty student finance firms like Navient. At the same time, stakeholders across the political spectrum, from Trump Treasury Secretary Steven Mnuchin to former President Barack Obama, have called for comprehensive new consumer protections for student loan borrowers.
The package of legislation before the House Financial Services Committee aims to put a stop to industry abuse by creating clear rights for borrowers that are binding on industry and enforceable by stakeholders across government and by individual borrowers.
- Borrowers deserve the same rights that people with mortgages and credit cards have long been guaranteed. In the student loan market, breakdowns harm every type of borrower, with every type of loan, at every stage of repayment. Lost paperwork, mishandled payments, deceptive disclosures, and the routine denial of borrowers’ repayment rights all add up to billions of dollars in additional debt for millions of borrowers. This legislation sets clear, enforceable standards to hold industry accountable, halt predatory practices, and reform the student loan system to be easier and more fair for millions of borrowers to navigate.
- Borrowers must be able to take student loan companies to court if they get ripped off. Whether dealing with a big bank or a student financial services firm, all student loan borrowers deserve the right to hold industry accountable when student loan companies break the law. For borrowers with federal loans, the Higher Education Act (HEA) establishes incredibly powerful repayment rights, particularly as it relates to borrowers’ options when facing economic hardship. However, when a private-sector financial services firm under contract with the government decides to deny borrowers’ rights, borrowers have little recourse—the HEA does not give individuals a cause of action to enforce their repayment rights. This legislation creates new enforceable consumer protections for borrowers with both private and federal student loans and bans “ripoff clauses” in loan contracts that can close the courthouse doors for borrowers demanding justice.
- ED is the nation’s largest consumer lender and its $1.1 trillion portfolio requires robust oversight to ensure borrowers are protected. Policymakers would never allow a big bank to “self regulate” itself, but in many ways the Department of Education is doing just that. The new bills would impose independent, statutory and regulatory requirements administered by the Consumer Financial Protection Bureau that cover the entire student loan market, including the servicing of both federal and private student loans. These new protections are transparent and enforceable so that borrowers aren’t at the whim of their student loan company or ED’s ability to self-police.
- Borrowers who are behind on their student loan debts will no longer face schemes by collectors to take money they don’t need to pay. Federal regulators have issued repeated warnings about abusive debt collection tactics by companies collecting on the nearly $200 billion in defaulted federal student loans. This legislation halts the most egregious debt collection abuses—practices targeting borrowers eligible for total payment relief under an income-driven repayment plan or a loan discharge under one of the many cancellation or loan forgiveness programs authorized under federal law.
- Borrowers who become totally and permanently disabled will no longer struggle with unaffordable private student loans. For decades, borrowers with federal student loans have had the right to debt relief if they become severely disabled. This legislation extends this right to borrowers with private student loans, leveling the playing field and ensuring that the most vulnerable borrowers are not pushed into poverty by unaffordable private student loans.
The student debt crisis is more than ballooning balances and the rippling repercussions. It is also the bullseye we have placed on the backs of 45 million people. The student debt crisis is a consumer protection crisis. We should all agree on one thing: if you are taking on debt to chase the American Dream, you should not be ripped off in the process. Empowering student loan borrowers and demanding accountability from the industry is a critical step to fixing a badly broken student loan system.
Thanks to the leadership and Members of the House Financial Services Committee, student loan borrowers will be one step closer to a student loan market that lives up to these ideals.
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Seth Frotman is the Executive Director of the Student Borrower Protection Center. He previously served as Assistant Director and Student Loan Ombudsman at the Consumer Financial Protection Bureau, where he led a government-wide effort to crack down on abuses by the student loan industry and protect borrowers.