Student Loans Suck, but Here’s How a Few States Are Making Them Suck Less

Tina Russell/The Penny Hoarder

What are your elected representatives doing to protect you from America’s growing student loan debt epidemic?

More than you might expect.

A national Student Loan Borrower Bill of Rights stalled in congressional committee a few years ago, and education policy is in flux. But states are pushing forward to provide their own protections for students.

The most recent: Illinois.

The Student Loan Borrower Bill of Rights passed in both houses of the Illinois General Assembly on May 31, and now waits for approval by Gov. Bruce Rauner.

The bill would create a student loan ombudsman in the state attorney general’s office, require student loan servicers to obtain a state license and require servicers to hire specialists to better serve student inquiries.

Illinois is poised to become the third state with similar protections for student loan borrowers, which apply to anyone studying in the state where a bill of rights exists.

Connecticut’s Student Loan Bill of Rights went into effect in July 2015, establishing the role of a student loan ombudsman. The Connecticut rule also requires student loan servicers to register with the state’s Department of Banking and the Office of the Student Loan Ombudsman.

Washington, D.C. (which is not a state, but… go with it) enacted its own borrower protections in February 2017. The Student Loan Ombudsman Establishment and Servicing Regulation Act of 2016 establishes a student loan ombudsman to monitor borrower complaints. The act also requires student loan servicers, whether they’re within or outside the District, to be licensed as such.

Washington, D.C. has not yet named an ombudsman.

Several other states, including Massachusetts, are eyeing potential protections of their own for students.

Student Loan Transparency Efforts

Alongside the push for state bills of rights for student loan borrowers, some states are voting for increased borrowing transparency to guide students through their loan-seeking years.

In 2015, Indiana legislators voted to require higher education institutions to distribute statements to those eligible for student loans. The statements provide an estimate of loans already taken out, the student’s estimated payoff amounts and estimated monthly repayment amounts.

Indiana University has been sending this type of notice to students since the 2012-13 school year as a part of its creation of an Office of Financial Literacy. In the office’s first four years, the school saw a 23% decrease in federal loan disbursement to its students — a reduction of $113.7 million in borrowed funds.

Nebraska enacted similar legislation in 2016. Starting in the 2017-18 academic year, students will receive a letter outlining the payoff estimate and monthly payment estimates for any federal loan they’ve been offered.

Washington’s Student Loan Transparency Act goes into effect in July 2018. It requires higher education institutions to provide detailed notices about loan balances and estimated monthly payments every time a school offers a financial aid package to a student. A borrower bill of rights has passed in Washington’s House and awaits a Senate vote.

Why Enact State Rules Instead of Waiting for National Legislation?

Since every state has an office that regulates banking, state legislation can establish rules to govern student loan servicers though those offices, according to Generation Progress’ report, “We Can’t Afford to Wait: How States and Municipalities Can Help Curtail the Student Debt Crisis.”

In states where these rules already exist, those banking regulators can enforce the rules. Creating an ombudsman position at the state level to volley borrower complaints would mirror the same role at the Consumer Financial Protection Bureau. The person in this role could work with the CFPB and the Department of Education to better assist borrower complaints.

“States contribute a lot of dollars to higher education. They have own grant and loan programs, and have a vested interest in making sure the students within their jurisdiction have rights and are protected,” Megan Coval, vice president for policy and federal relations at the National Association of Student Financial Aid Administrators (NASFAA), said.

State protections can be especially helpful in cases of fraudulent institutions or those who close their doors with little notice to students.

The Letter of Estimated Annual Debt for Students Act of 2017, known as the LEADS Act, is floating around Congress and has been in the House Committee on Education and the Workforce since March. It would require institutions to provide an annual cost estimate that includes cumulative balances, monthly payment amounts and interest rates each summer after a student takes out their first federal student loan.

But it’s more likely that increased federal transparency for student loan borrowers will come via the Higher Education Act, which is overdue for reauthorization, Coval noted. “The good news is that, behind the scenes, Congress is working on this,” she said.

Lisa Rowan is a writer and producer at The Penny Hoarder.