Future student loan borrowers in the Golden State may be getting their own bill of rights.
On Tuesday, the California assembly passed the “Student Borrower Bill of Rights,” or AB376, aimed at creating the first detailed set of rules protecting those holding student debt in the U.S.
The legislation passed with an initial vote of 59 to 15 and now awaits passage through Senate committees and eventually a floor vote.
Mike Pierce, Policy Director and Managing Counsel at the Student Borrower Protection Center (SBPC), which co-sponsored the bill with others, told Yahoo Finance that "the full Senate must pass the bill no later than September " to make it to California Governor Gavin Newsom's desk for his final signature before the end of the year.
The vote “demonstrates California’s ongoing commitment to protecting student loan borrowers in the face of resistance from the Trump Administration… [which] has dismantled protections for student loan borrowers,” Seth Frotman, the former top student loan official at the federal Consumer Financial Protection Bureau and Student Borrower Protection Center Executive Director, said in a press release.
After resigning in August, Frotman established the SBPC.
Frotman asserted that with student loan borrowers “defaulting every 28 seconds, I urge the California State Senate to act quickly and advance this critical legislation.”
The ‘Student Borrower Bill Of Rights’ would establish ‘rules of the road’
According to the SBPC, the bill essentially hopes to establish the following:
Ban “abusive” student loan servicing practices that take unreasonable advantage of borrowers’ confusion over loan repayment options;
Create minimum loan servicing standards to ensure fair application of payments, improved record-keeping on borrower accounts, and proper staff training so borrowers are informed of more affordable payment options;
Establish a Student Loan Advocate to review borrower complaints, gather data, and issue reports to the state legislature; and
Grant the Department of Business Oversight additional “market monitoring” authorities to collect better data about the student loan servicing industry.
Ultimately, it hopes to “create the first comprehensive, industrywide ‘rules of the road’ for the student loan industry, offering student loan borrowers the same kinds of strong, enforceable protections available to consumers with mortgages and credit cards,” the SBPC explained.
Because “unlike consumers with mortgages and credit cards, student loan borrowers currently have few protections when interacting with their loan servicers,” Consumer Reports, which also co-sponsored the bill, said in a press release. “Student loan servicers are generally prohibited from engaging in unfair or deceptive practices, like any other business in California, but they are not currently subject to industry-specific standards.”
California faces a ‘student debt crisis’
According to the Assembly Bill, California is facing a “student debt crisis,” with more than 3.7 million borrowers owing nearly $125 billion in student debt, which is about $33,000 on average.
The overall level of outstanding student debt in the U.S. stood at $1.49 trillion in the first quarter of 2019, up $29 billion from the last quarter, according to the New York Fed.
And borrowers are increasingly unable to meet repayment deadlines, with delinquency rates rising steadily from 9.08% in the last quarter in 2018 to 9.54% in Q1 2019, according to Fed data.
The bill added that in 2017, “more than one million Americans defaulted on a student loan nationwide — three times the number who lost homes to foreclosure over this period.”
The bill continued: “These financial issues affect every aspect of their lives. From buying a home to choosing a career, from starting a family to saving for retirement, student debt casts a shadow that many Californians cannot escape. California is just beginning to see how this debt fuels economic, gender, and racial inequality, inhibits asset accumulation, accelerates wealth gaps, and carves out a generational divide that will take decades to erase.”
These points have been highlighted by many, from banking giant J.P. Morgan CEO Jamie Dimon to presidential candidate and Sen. Elizabeth Warren (D-MA). Even restaurant chain Burger King launched a $250,000 sweepstakes for student debt borrowers.
California has taken steps against predatory student loans servicers who are blamed for the crisis by many, including Frotman.
“For too long,” Frotman stated, “student loan companies have had free rein to cut corners and cheat borrowers, often making it impossible for millions of Californians to get out from under the weight of historic student debt.”
The state’s attorney general filed lawsuits or “or took enforcement actions against student loan servicers,” alongside attorneys general in other states like Massachusetts and New York from 2017 to 2019.
But since the “federal government has failed to take necessary action to halt widespread abuses,” and with the “increasingly uncertain federal landscape,” the bill then urged that “the State of California has an opportunity and an obligation to act.”
Aarthi is a writer for Yahoo Finance. Follow her on Twitter @aarthiswami.