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Media Domino: A Blog About Student Debt The COVID-19 Pandemic has Highlighted the Need for California to Address the Student Institutional Debt Crisis

The COVID-19 Pandemic has Highlighted the Need for California to Address the Student Institutional Debt Crisis

By Britta Kajimura and Doug Lewis | May 23, 2022

So-called “institutional debt” that is owed by students directly to a college or university can arise from charges as small as library fees or parking fines, but it can lead students into substantial financial hardship. Worse, a recent report revealed that this type of debt has exploded during the COVID-19 pandemic. Without action, students across the country, including possibly millions in California alone, could be trapped in debt to the very institutions they thought would guide them toward the purported “American Dream.”

Policymakers in the Golden State already have the tools to prevent this troubling outcome. As we outline in a new memo we published today through the Center for Consumer Law and Economic Justice at the UC Berkeley School of Law and the Student Borrower Protection Center, California’s new Department of Financial Protection (DFPI) can protect students from runaway institutional debts through its existing ability to regulate schools as debt collectors when they choose to act as such. Against the backdrop of a pandemic, the DFPI must quickly wield this authority to protect California students.

Read our memo on how the DFPI can protect students from abusive debt collection tactics by colleges here.

During COVID, Institutional Debts Exploded in California

When students withdraw from college and universities that have access to Title IV aid, including Pell Grants and federal student loans, the school generally has to pay back the Department of Education for any aid the students used. In turn, schools usually pass this cost on to students in the form of an “institutional debt”—that is, one owed directly from the student to the school.

A recent report from a team of researchers at the University of California Berkeley School of Law and the University of California Irvine School of Law Merced found that when waves of California students dropped out of college in response to the COVID-19 pandemic—something that happened across the country—at least 750,000 California students became indebted directly to California public colleges to the tune of $350 million. The report shows that this pattern had the harshest effects on low-income students, who make up a disproportionate share of those now in hock to a “Creditor College.” Given the federal “Return to Title IV” policy, the students who are most reliant on Title IV aid are also the most vulnerable to incurring extreme amounts of institutional debt. As students withdrew from school mid-semester, they found themselves thus saddled with debts immediately due to their schools.

Institutional debts currently lack the consumer protections afforded to federal student loans and the flexibility of federal loan repayment plans. Given this lack of protection, this type of debt can subject students to harmful practices employed by schools, including diploma, grades, or transcript withholding, and prevention of re-enrollment in future classes. These practices can create a tragic Catch-22 where borrowers need a diploma, grades, or transcript to get the job necessary to pay off a debt to their school—while they also need to pay off the debt before they can access their diploma, grades, or transcript.

California Must Once Again Stand Up for Students

California was one of the first states to recognize the abusive nature of the practice of transcript withholding, and it enacted a law that would bar schools in the state from using that practice to collect on debts. However, California’s regulatory framework already allows for far stronger protections over students’ ballooning institutional loans.

Today’s memo outlines how the DFPI can and should hold all colleges and universities who act as debt collectors—whether those schools are public, non-profit, or for-profit—to the same legal standards as all other debt collectors operating in the state. In particular, the DFPI can apply existing debt collection regulations under the Rosenthal Fair Debt Collection Practices Act, the California Consumer Financial Protection Law, and the Debt Collection Licensing Act to properly oversee institutional debt collection practices. Our memo identifies the statutory provisions that DFPI can use to: (1) oversee schools’ debt collection practices, (2) enforce existing laws prohibiting schools from transcript withholding and collecting on voided loans, and (3) establish new regulations to combat schools’ abusive debt collection practices beyond transcript withholding.

California was among the first states in the country to stand up for students targeted by the harmful effects of debt collection practices employed by colleges and universities. Increased protection, already granted by California’s statutes, is needed now more than ever as vulnerable student borrowers continue to accrue institutional debt in the wake of the COVID-19 pandemic. The DFPI can draw from its plenary powers and existing state law to regulate these harmful debt collection practices and protect California’s students.

As always, California can and must lead in the fight to protect borrowers.


Britta Kajimura and Doug Lewis are students at the University of California, Berkeley School of Law.

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