States are seeking strategies to mitigate the negative effects of student loan debt. These efforts include repayment assistance and forgiveness plans. Many states have also enacted legislation to create new regulations and consumer protections regarding student loan lending, borrowing and repayment. Since 2015, 13 states have passed legislation to expand student loan oversight.
Outstanding student loan debt in the U.S. reached $1.53 trillion owed by more than 45 million borrowers in 2018. As borrowers work to repay these loans, many find the terms and repayment options associated with these loans to be confusing and difficult to navigate.
In 2017, the Consumer Financial Protect Bureau (CFPB) handled approximately 23,000 complaints related to student loan servicing. The CFPB’s report also found that “borrowers assigned to the largest student loan servicers may encounter widespread problems.” In 2019-2020, the number of complaints declined to approximately 7,000 complaints filed, but federal loan repayment was largely paused during this period under the provisions of the CARES Act.
A 2018 survey found that more than 1 in 3 student loan borrowers had difficulty accessing information about their loans and repayment status. The same survey found 59% of borrowers experienced unclear guidance about their repayment situation and options from loan servicers. Common difficulties for borrowers include:
- Lack of information regarding available repayment plans including income-driven repayment options.
- Confusing repayment terms and conditions.
- Slow or inaccurate processing of loan payments and changes.
Confusion and difficulty understanding repayment options can force borrowers to accrue additional interest, pay unnecessary fees or penalties, and can slow down repayment which could lead to delinquency or default.
In recent legislative sessions, states have imposed new regulatory guidelines and created protections designed to help borrowers understand their repayment options and navigate the loan servicing process. These bills expand student loan oversight to include requirements for student loan servicers as well as the creation of a student loan ombudsman to oversee servicers and assist borrowers. Proponents of these bills argue states should take proactive roles in both regulating loan servicers and helping borrowers stay informed about repayment. However, loan servicers argue these regulations drive up costs and create a confusing patchwork system of oversight for student loan repayment.
Loan Servicing Requirements and Licensure
In recent years, states have imposed new regulatory guidelines for student loan servicers. These provisions commonly subject student loan servicers to oversight from a state banking or finance authority. Legislation often includes requirements that servicers cannot engage in unfair or deceptive processes. Some states include specific provisions that require servicers to meet specific rules for responding to borrower complaints. Many states also provide authority to impose fees on servicers that do not comply with these requirements.
Connecticut HB 6915 (2015)- Requires student loan servicers to be licensed with the state Banking Commissioner. Includes provisions that loan servicers may not: employ any scheme, device or artifice to defraud or mislead student loan borrowers; engage in any unfair or deceptive practice; knowingly misapply or recklessly apply student education loan payments; or knowingly or recklessly provide inaccurate information to a credit bureau.
Student Loan Ombudsman
States have also created student loan ombudsman (or advocates) offices that are charged with overseeing student loan oversight. Common ombudsman responsibilities include:
- Reviewing borrower complaints and providing assistance to borrowers.
- Compiling student loan borrower and repayment data.
- Managing information sharing and publicity efforts between borrowers and their families and institutions.
- Providing annual reports to the legislature.
Virginia SB 394 (2018) - Establishes the Office of the Qualified Education Loan Ombudsman within the State Council of Higher Education for Virginia. Ombudsman duties include: receiving, reviewing, and attempting to resolve complaints from qualified education loan borrowers; compiling and analyzing data on such complaints; assisting borrowers to understand their rights and responsibilities under the terms of qualified education loans; providing information regarding the problems and concerns of qualified education loan borrowers; analyzing and monitoring the development and implementation of applicable laws and policies; and disseminating information concerning the availability of the Ombudsman to assist with qualified education loan servicing concerns.
Providing Information to Borrowers
Requirements for Private Loan Servicers
Additional oversight is often applied to private student loans, which despite comprising less than 15% of total student loans in the US, are a rapidly growing form of student loan debt. Some states have expanded oversight provisions that apply specifically to private loan providers to ensure that borrowers with these loans receive certain information and guidance.
Illinois HB 1351
(2017) – Requires private loan servicers to provide information about alternative repayment options including policies and procedures for providing these materials to borrowers online.
While states have passed legislation to expand oversight of student loan servicers, the federal government has contested some of these regulations. In March 2018, the Department of Education issued a notice of interpretation asserting that state oversight of federal student loans “impedes uniquely federal interests.” The department guidance was particularly concerned with Massachusetts’ lawsuit against a loan servicer but further claimed “attempts by other States to impose similar requirements will create additional conflicts with Federal law.” This policy reversed the guidance from the department in 2016, which stated that state regulations would not preempt federal law.
This announcement prompted the Pennsylvania Higher Education Assistance Agency (PHEAA), a loan servicer, to file suit against the state of Connecticut. PHEAA claims Connecticut law puts the servicer in conflict with federal law and risks losing its ability to operate in the state. In June 2019, the 7th U.S. Circuit Court of Appeals issued a ruling that student loan servicers are subject to state laws related to student loan oversight and that these laws are not preempted by the federal government. Legal experts have speculated that additional court cases will move forward at the federal level, potentially moving to the U.S. Supreme Court if rulings conflict at the district level.