Borrowers owe more than $140 billion dollars in private student loans—loans made by banks and other private lenders without the involvement of the federal government. These loans are riskier than federal student loans and contain fewer safeguards for borrowers who have trouble managing their monthly payments. These include predatory loans made by failed for-profit college operators, big banks, and private lenders—loans that are then sold and resold using practices that mirror the worst aspects of the crisis-era mortgage market.
Adding insult to injury, these loans are not eligible to be discharged through the normal bankruptcy process, ensuring predatory debt follows the most vulnerable borrowers throughout their financial lives.
States can change this.
States are stepping up to protect borrowers with existing debt from abuses by lenders, servicers, debt buyers, and debt collectors. Moreover, states are taking action to make new loans safer for borrowers and rein in the worst abuses by financial services companies across the lifecycle of a private student loan.
Protecting cosigners, including older consumers, from bait-and-switch marketing and deceptive lending tactics when loans are originated
As AARP reported in 2019, “student loan debt is soaring for borrowers over 50.” According to the Consumer Financial Protection Bureau, older consumers face a range of predatory lending tactics that result in unexpected private student loan debt, including reliance on dubious electronic signatures at origination and marketing tactics that promise “cosigner release” after a few years of payments but shackle older adults to a lifetime of debt. States can push back by requiring private student lenders provide enhanced disclosures for cosigners and sets standards for lenders offering new loans with “cosigner release” benefits.
Protecting borrowers from debt collectors and abuse of the courts
Private student loan collectors frequently emulate some of the worst practices seen during the mortgage crisis. Shady creditors falsify documents in “robo-signing” schemes to churn out collection lawsuits. Companies send borrowers off to collections right as they are negotiating alternative repayment plans.
States are free to determine who can seek a judgment in state court and what debts qualify, presenting an opportunity for legislators to shut the doors on predatory private lenders and debt buyers. This legislation:
- Bars creditors from pursuing borrowers for any student loan that cannot be discharged through a Chapter 7 bankruptcy—immediately protecting borrowers from wage garnishment and other judicial collections and potentially creating a powerful, long-term incentive for the federal government to reform the bankruptcy system;
- Protects borrowers from lawsuits and negative consequences when working with their private lender to obtain an affordable payment; and
- Requires creditors to prove the debt is valid and the balance is accurate by producing original loan documentation at the time a court order is sought—the same common-sense restrictions recently placed on banks in states across the country when pursuing foreclosures.
Demanding accountability across the private student loan marketplace
There is currently no comprehensive registry of private lenders making loans to American students. As a result, policymakers, regulators, and enforcement officials lack basic information about the companies operating in each state. This leads to an underbelly of predatory private lenders that operate in the shadows, away from regulatory and public scrutiny. This legislation establishes a first-of-its-kind registry of lenders, mirroring requirements in place for consumer lenders in states across the country. As part of this registry, companies operating in the state are required to report on loan volume, loan performance, and other key characteristics, including race, gender, and other demographic information about new student loan originations.
Protecting senior citizens from predatory practices by student loan servicers
In 2017, the Consumer Financial Protection Bureau warned consumers about a range of servicing abuses that can drive older student loan borrowers deeper into debt. Older borrowers have been denied critical protections like disability discharge and access to payment relief when living on a fixed income. This legislation sets new standards for the servicing of cosigned private student loans by mandating a process for disability discharge, requiring servicers facilitate timely and accurate payments by cosigners to cosigned loans, and establishing new standards for customer service representatives to provide assistance to older student loan borrowers.