'Student borrower bill of rights' doesn't pay off

Veterinary debt expert says proposed California legislation misses the mark

June 18, 2019 (published)
By Tony Bartels

Photo by Audra Fenimore
Dr. Anthony Bartels, pictured with his dog Addi on Handies Peak in Colorado, is the student debt consultant at the Veterinary Information Network, which is based in California.

As the student debt consultant at the Veterinary Information Network, an online community for the profession, and as someone who, with my spouse, amassed $400,000 in debt from veterinary school, I pay attention to public policy proposals related to student borrowing.

That's why I found myself the other day reading over legislation that passed the California Assembly on May 28. It's dubbed the Student Borrower Bill of Rights. Sounds good, right? Apparently lawmakers thought so, as the bill sailed through the Assembly 59-15. It's scheduled to be heard Wednesday by the Senate Banking and Financial Institutions Committee.

AB 376 lays out this legislative intent:

  1. Promote meaningful access to affordable repayment and loan forgiveness benefits for student loan borrowers in California.
  2. Ensure California borrowers can rely on information about student loans and loan repayment options provided by student loan servicers.
  3. Build upon the Student Loan Servicing Act to set effective minimum student loan servicing standards and to ensure that California borrowers are protected from predatory student loan industry practices.
  4. Promote the public interest in furtherance of the state's historic police powers to protect the health, welfare, and safety of the state and, in furtherance of the public interest, the act should be liberally construed to effectuate that intent.

You know what they say about the road to hell being paved with good intentions?

Student loan borrowers don’t need vague intentions meant to sound beneficial and attract headlines. We need actionable alternatives to the complex student loan repayment landscape currently in place. This proposal doesn't provide them.

The overwhelming majority of the outstanding student loan debt in the United States is governed by contracts between the borrower and the U.S. Department of Education. What authority does the legislation propose here that would change any of that arrangement or allow the state of California to enforce those contracts differently? I see none.

Much of what the bill proposes that the state govern is already covered in my Direct Loan master promissory note. Right now, it's up to me to keep my own loan servicer honest based on the terms governing that contract. I don't see anything in the Bill of Rights that changes that. For example, as described by the Assembly Floor Analysis, the Bill of Rights would:

“Apply overpayments in a manner that is in the best financial interest of the borrower."

This is already defined by the Higher Education Act governing my student loan. California cannot change how payments are applied under my existing student loan contract.

"Apply partial payments in a manner that minimizes negative impacts to borrowers."

Again, how payments are applied, partial or otherwise, are already described in my existing student loan contract.

"Ensure past dues fees are reasonable and proportional to the total costs of the loan, as specified."

This process is defined in existing student loan contracts, as well.

If you want to "protect" student loan borrowers from "predatory student loan industry practices," then define reasonable and proportional. Take a stand against just how much fees and interest can be charged to California residents for past-due items. The proposed clause is as meaningless as the existing ambiguous process for student loans collections.

The bill's provisions aren't completely futile. Maybe we would all benefit from a California student loan advocate who can analyze what's happening and publicize complaints and practices as experienced by California student loan borrowers. The federal Consumer Financial Protection Bureau used to do that. The current administration has shown that exercise to be optional.

Overall, however, the California proposal falls short of being even a "feel good" piece of legislation.

Student loan repayment is complicated. There are numerous options, many of which require significant financial education to understand. The loan servicers are not financial advisers, nor were they ever intended to be. Yet, many of the income-driven repayment options require a special understanding of the contracted arrangements and the personal circumstances of the borrower to apply appropriately.

How exactly would the state “Ensure California borrowers can rely on information about student loans and loan repayment options provided by student loan servicers”? Would it provide the education necessary for borrowers to evaluate and choose the most beneficial repayment option for their situation? Would licensing standards be applied to professionals who sell advice on student loans to California borrowers? How about special education from private refinance companies who lend to California borrowers, regarding the risks of moving federal student loans into a private loan? These items are not identified in this bill of rights.

California, control what you can control

Educational loans are a result of paying for college. Many colleges are located in California. What if the state required those schools to describe in detail the borrowed amounts and repayment options for the debts students are incurring to receive their education? In my experience, colleges are just as complicit in the lack of borrower-repayment understanding as the loan servicers.

Consider requiring schools to document what has been borrowed each semester, the anticipated amounts still to be borrowed to complete the course of study, and the cost to pay that total after graduation. Schools that have provided annual statements on borrowed amounts and anticipated monthly payments reportedly have seen a decline in borrowed amounts. But such schools are few and far between.

Having schools send annual debt notification letters to borrowers is among the recommendations of the U.S. Financial Literacy and Education Commission in a new report, Best Practices for Financial Literacy and Education at Institutions of Higher Education.

Along with your California Student Loan Advocate, offer some education directly to borrowers to help them understand their current repayment options. The student loan repayment options have become so complex, with income-driven repayment and public service loan forgiveness, that basic financial literacy no longer cuts it. The education around student loan repayment must be specific and relevant to the litany of options available and how those options change based on the borrower’s circumstances.

As for private loan risks for federal student-loan borrowers, here's something for lawmakers to consider: Navient, one of the largest federal student loan servicers (and possibly the most terrible, judging from the number of lawsuits against them for terrible loan servicing practices), markets private loan refinancing products directly to the borrowers of federal student loans whom they service. How is that not a conflict of interest?

What is the incentive for Navient to be good at federal student loan servicing when they offer a competing product? It almost seems like being terrible at federal student loan servicing is part of their private loan refinancing sales plan.

California could help by prohibiting student loan servicers from peddling to California borrowers products that directly compete against the service they are supposed to be providing to federal loan borrowers.

Beyond that, California could make a real impact on the quality of loan servicing by offering California student loan borrowers refinancing under a new contract that would be between the state and its borrowers. That contract can have all of the favorable terms and conditions that the bill of rights lays out. The state could even set up a servicing arrangement with inside or outside entities that meet any of the requirements it thinks are fair.

The program would need to detail the exact rights borrowers would have and offer repayment provisions that are at least as beneficial as those set up by the U.S. Department of Education, in order to give borrowers the incentive to switch.

I realize that having the state of California assume control of student loan financing would be expensive. It would be bold. But California is a large, influential state with a robust economy and a history of leading in enlightened public policy. And for it to have any real control over the behavior and practices of student loan servicers, it needs to have real control of the structure of the game.

That would be meaningful reform.

About the author: Tony Bartels graduated in 2012 from the Colorado State University MBA/DVM program. He and his wife, a small-animal internal medicine specialist practicing in Denver, have more than $400,000 in veterinary-school debt that they manage using federal income-driven repayment plans. By necessity (and now obsession), his professional activities include researching and speaking on veterinary-student debt, providing guidance to colleagues on loan-repayment strategies and contributing to VIN Foundation initiatives. Beyond debt, his professional interests include small- and exotic-animal practice. When he’s not staring holes into his colleagues’ student-loan data, Tony enjoys fly fishing, ice hockey, camping and exploring Colorado with his wife, Audra, and their two rescued canines, Maggie and Addi.

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