Next February, student loan borrowers in the District of Columbia will receive a new consumer protection. The financial firms operating in the city to handle payments and provide a point of contact for the customer’s student loans must be licensed, with the possibility of revocation if the firm has committed a misrepresentation or dishonest act. Such firms must maintain certain performance standards including reaching out to delinquent borrowers to assist them with avoiding default. Finally, the new law creates an ombudsman position that will take in borrower complaints, analyze trends and report findings to policy makers.
The District joins Connecticut and California in protecting student loan borrowers at a state level in this way. These laws and proposed bills have similar features. Here are ConnPIRG's testimony and release in support of their law, which passed in 2015.
Similar proposals are currently pending in New York and Massachusetts, Michigan, and Rhode Island. With the federal Consumer Financial Protection Bureau under attack by banks and financial firms seeking to limit its ability to protect consumers like student loan borrowers, it is heartening that local authorities are stepping up.
Sadly, on Friday, a similar proposal approved by the Illinois legislature died on the governor’s desk. The argument for veto rested in part on the assertion that student loan borrowers in Illinois will need a more narrow set of protections once federal rules are finalized in this marketplace. But student loan borrowers who are currently in conflict with a servicer need help right now. The bill had been championed by state Attorney General Lisa Madigan, who has investigated and sued Navient, the nation's largest student loan servicer. Madigan and 18 other state Attorneys General have also sued the U.S. Department of Education for rescinding pending rules to protect students victimized by predatory for-profit schools.
The problems causing student loan debt are many, but they are all made worse when students encounter tricky consumer products and practices that drive up costs.
Markets work best when consumers have strong federal laws as a floor (not a ceiling) of protection and those laws are robustly enforced by tough federal agencies such as the CFPB. Then, consumers and markets need states to be able to pass stronger state laws with enforcement by state attorneys general, other local enforcers and, finally, by consumers and their attorneys themselves through private rights of action.