Student Loan Borrower Bill of Rights

Who is covered

States have virtually unfettered authority to license and regulate non-bank financial firms, such as third-party servicers, whereas state legislation requiring a bank to obtain a license may be preempted. The model legislation therefore applies to any person engaged in servicing, but exempts banks and similar entities from licensure. Exemptions from the bill’s consumer protections are not required.

Applicability to federal student loan servicers

Companies with contracts to service federal student loans on behalf of the U.S. Department of Education can be licensed, but these licenses must be issued automatically. Federal courts have struck down as preempted laws that require federal contractors to apply for state licenses and that give states the discretion to deny these licenses, on the grounds that states cannot second-guess the federal government’s choice in its contractors. The model legislation therefore deems a company contracted to service federal student loans as automatically licensed, upon filing of an application fee and a copy of the federal contract, thereby removing state discretion. Once licensed, the companies are subject to all of the state’s oversight authority and consumer protections.

Setting rules of the road

The sample legislation includes both broad and specific consumer protections. It provides regulations targeted at addressing known industry misconduct related to payment processing, complaint resolution, and inaccurate customer service. It also prohibits unfair, deceptive, or abuses acts or practices, a standard to which these companies are already subject at the federal law and which can address unforeseen issues in the future.

Private right of action

Private rights of action—the ability for private individuals who have been harmed to enforce their own rights in court—are critical for any consumer protection to be meaningfully enforced. Although state regulators and attorneys general are powerful public enforcement offices, they have limited staffing and budgets, which practically reduces their ability to protect all consumers. Enabling affected borrowers to represent themselves and similarly situated borrowers complements the public enforcement powers and ensures greater compliance. The bill’s private right of action includes a fee-shifting provision, which requires any servicer who is found by a court to have violated the law to pay for the borrower’s litigation costs and attorneys’ fees. Fee shifting is an important tool that allows low-income borrowers to find legal representation, since the lawyers can be confident that they will be paid by the losing side. This also incentivizes borrowers and lawyers only to bring meritorious cases.

Student Loan Ombuds

The sample legislation creates a state-level student loan ombuds role to assist borrowers in two critical ways. First, they provide trusted information to borrowers about their student loans and repayment or cancellation opportunities. Second, they field complaints by borrowers about their servicers and ensure that the licensed servicers adequately respond to the complaints in a timely manner. Ultimately, the ombuds serves as a quarterback in state government to ensure borrowers’ needs are met. States with student loan ombuds generally house them within their state office of the attorney general or their financial regulator. The appropriate fit will vary by state and will depend on the culture of each office.