New Yorkers with student debt may soon have an easier time paying back their loans if one lawmaker gets his way.
Kenneth Zebrowski, a Democratic Assemblyman representing Rockland County, New York, introduced a bill this week that would regulate student loan servicers — the companies that manage the student loan repayment process — in the state. If passed, the law would require that servicers operating in New York be licensed by the state, live up to basic consumer protection standards and prohibit the companies from misleading borrowers.
“It’s important for states to have a mechanism where these companies are regulated, there’s definitive responsibilities and prohibitions on the way that they operate, and there’s a clear and concise avenue for consumers to register complaints,” Zebrowski said.
The bill is the latest effort in a broader push by state lawmakers across the country to monitor student loan companies in their region amid uncertainty about the federal government’s stance on student loan firms’ obligation to borrowers.
Borrower advocates have complained for years that servicers don’t do enough to work in borrowers’ best interest. That, they say, has exacerbated the student loan crisis. Despite the improving economy, more than 1 million federal student loan borrowers defaulted on their debts last year. Many of those defaults were likely avoidable given that the government provides borrowers with a variety of repayment options to manage their debts.
Servicers have argued that the challenges faced by borrowers have more to do with confusion regarding the complex student loan system. They say that they’re typically able to help borrowers when they’re able to reach them. In a March letter to leaders of New York state’s assembly and senate, the National Council of Higher Education Resources, a servicer trade group, also argued that that state-level oversight could create confusion for borrowers and servicers, given that the companies are already subject to regulation by the Consumer Financial Protection Bureau.
The servicers that manage the student loan repayment process for borrowers with federal loans receive lucrative contracts from the government for this work. Over the last year, the Obama administration began taking steps to revamp the process for awarding those contracts so that servicers would be incentivized to take the time necessary to help borrowers find the repayment arrangement that’s best for them.
But current Secretary of Education Betsy DeVos took steps earlier this month to reverse those reforms. That’s added urgency to the efforts of borrower advocates, state lawmakers and regulators to protect consumers in their locales. Attorneys general from 20 states, including New York, Illinois and California, sent a letter to DeVos this month to express their “profound concern” about DeVos’s decision to withdraw the Obama-era guidance on reforming the servicer contracting process. A coalition of borrower advocacy groups also sent a letter this week to every state attorney general, urging the state law-enforcement officials to investigate and sue student loan servicers that break the law.
“With this administration not willing to protect borrowers, we’re really look for the states to step up,” said Maggie Thompson, the executive director of Generation Progress, the youth-focused advocacy arm of the Center for American Progress, a left-leaning think tank.
Though the Trump administration’s recent actions on student loan servicing have borrower advocates increasingly concerned, state-level advocacy on the issue began during the Obama era. Connecticut became the first state in 2015 to license its student loan servicers. Several states and localities have followed suit since, though in some cases implementing the new laws has been challenging.
In Washington, D.C. where last year, the city council unanimously approved a bill to regulate student loan servicers in the city and hire a student loan ombudsman — essentially a city employee dedicated solely to student loan education and complaint resolution — officials are still dragging their feet on implementing the law, advocates say.
“We’ve always been eager for the council and the mayor to take on student debt as a primary issue of theirs,” said Ari Schwartz, a lead organizer with DC Jobs with Justice, an economic justice organization. “That’s even more urgent now given how the federal government and student loan servicers have completely abandoned any pretense of supporting customers and supporting borrowers.”
The explosion in the number of borrowers taking on loans and the growing size of their debt loads over the past several years has also upped the urgency from states to help borrowers cope with their debt. The relatively rapid growth in student debt over the past decade has meant that the consumer protection infrastructure that we typically see surrounding mortgages, credit cards and other financial products hasn’t had time to catch up, advocates and regulators have argued. That’s in part why some national regulators like Seth Frotman, the student loan ombudsman at the Consumer Financial Protection Bureau, have expressed support for these types of state-level efforts.
“Close coordination between federal and state regulators is critical to ensuring that borrowers can depend on high quality student loan servicing, subject to rigorous oversight, whether their servicer is a large public company or a small not-for-profit,” Frotman said during March testimony in front of the California Senate’s banking and financial institutions committee.
Still, passing legislation to regulate servicers in New York may face an uphill battle. The state’s governor, Andrew Cuomo, included a plan in his proposed budget to oversee servicers in the state. But that provision was removed by the time the final budget was passed and signed into law. NCHER, the servicer trade group, sent its letter to the state’s legislative leaders during the intervening period. The governor’s office did not immediately respond to a request for comment about why the provision was removed.
For Zebrowski, 36, who is still contending with his own debt from undergraduate and law school, the situation is urgent. The level of outstanding student debt more than doubled in New York over the last decade, rising to $82 billion, according to a 2016 report from the state’s comptroller. And many borrowers in the state appear to be struggling; the delinquency rate among those borrowers increased by more than a third over the last decade, the report found.
Evan Denerstein, an attorney at MFY Legal Services, an organization that provides legal help to low-income New Yorkers, said he regularly meets with clients who struggle to get access to accurate information from their student loan servicer. In some cases they’re legally entitled to a lower repayment program or even a disability-related discharge and yet, they’re unable to claim it without his legal assistance.
“They’re not being informed of their rights and sometimes they’re being misinformed of their rights,” said Denerstein, who has been a leading advocate in fighting for the New York servicing legislation.
One of those borrowers, Carolle, has struggled to pay back her more than $20,000 debt on the salary she pulls in as a part-time home health aid. Despite being legally entitled to access a repayment plan that would have allowed her to stay current on her loans with payments as low as zero dollars a month, she never heard about those options from her servicer. Meanwhile, she defaulted on her student loan and lost out on a much-needed tax refund. “I don’t think those companies tell you that there is a way to find help,” she said. She was only able to enroll in an income-driven repayment program with Denerstein’s help.
It’s episodes like these that have convinced Denerstein that it’s time to regulate student loan companies in the state. “There really needs to be some supervision of student loan servicers,” he said. “There’s a question with the new administration of what’s going to happen at the federal level. New York has always been a leader when it comes to consumer protection and this is really a chance for them to step forward and take a lead on this issue.”