In a landmark move today, California Governor Gavin Newsom signed into law sweeping legislation to protect student loan borrowers.
Referred to as a student loan borrower “bill of rights,” the new law establishes enforceable, statewide industry standards for student loan servicers and protects student loan borrowers against unfair, deceptive, and predatory practices by servicers and lenders. The bill was previously approved by the California State Assembly; the State Senate followed suit in August.
“With Governor Newsom’s signature, [the] Student Borrower Bill of Rights is now law guaranteeing millions of people with student loan debt have the consumer rights and protections they deserve,” said Natalia Abrams, Director of Student Debt Crisis in a statement. “For years, thousands of California student loan borrowers told us about problems with student loan companies. These problems that have cheated people out of millions of dollars and caused real stress for families who had no recourse. Now, with the Student Borrower Bill of Rights, Californians have real, enforceable rights and can take action when they are harmed.”
“Today is a huge victory for student borrowers in California,” said Kristin McGuire, Western Region Director at Young Invincibles.“ We know that overwhelming student debt disproportionately impacts Black, Latinx, and first-generation college students. The passage of AB 376 will help ensure that these borrowers, along with veterans, are protected from predatory lending practices that have plagued our communities for far too long. We applaud Governor Newsom’s leadership and his efforts to protect borrowers.”
California’s new rules will ban abusive student loan servicing practices such as wrongfully steering borrowers into forbearances and away from relief programs like income-driven repayment. It also creates minimum servicing standards related to the application of student loan payments and retention of key records, and would also mandate specialized customer service training for staff. Importantly, the new law creates a Student Borrower Ombudsman’s office, which would be responsible for reviewing and acting on complaints submitted by borrowers, and gathering and analyzing key data. And it establishes special protections for military personnel and their families as well as nurses, teachers, and the disabled community.
Student loan servicing is widely viewed as problematic. Multiple state attorneys general have brought lawsuits against major federal student loan servicers alleging widespread misconduct. A new report released last month confirmed that student loan servicers continue to have substantial problems administering federal loan programs such as Public Service Loan Forgiveness. And even the U.S. Department of Education’s own inspector general found significant problems with student loan servicing, including a lack of appropriate oversight.
Critics of the bill question the ability and authority of states to regulate student loan servicers who are contracted with the federal government, citing supremacy of federal law over state law. However, several recent court decisions have affirmed the ability of states to regulate federal student loan servicers under state consumer protection statutes.