Student loan measure aims to tame ‘wild west of consumer finance’

Update: Assembly Bill 382 failed to pass on the Assembly floor. It needed a two-thirds majority, but fell one vote short. All the Assembly Democrats voted for it, but only one Republican, Jill Tolles of Reno, voted for it, and it would have taken all Democrats plus two Republicans to reach two-thirds.

The Nevada Legislature is poised to establish an expansive set of rights for student loan borrowers—but even robust state regulations and protections won’t mean relief for the 330,000 Nevadans currently saddled with over $11 billion in student debt. 

Assembly Bill 382, sponsored by Assemblyman Howard Watts (D-Las Vegas), would broadly follow the lead of over a dozen other states, which require student loan servicers to be licensed and regulated by the state, and student borrowers to be given a set of affirmative rights (commonly referred to as “Student Borrowers’ Bill of Rights”). The Nevada bill also goes beyond the traditional Borrowers’ Bill of Rights to include provisions regulating private lenders and forbidding schools from withholding transcripts because of debt.

The bill was first heard in early April, went through the Assembly Ways and Means committee this week, and was scheduled to be heard on the Assembly floor Friday.

Nationally, Americans owe $1.6 trillion in student loan debt—the largest category of household debt after mortgages, ahead of credit card debt. The overwhelming majority, over 90 percent, of student loan debt is owned by the federal government, and the remainder is owned by private companies that tend to provide riskier, more inflexible loans to borrowers.

The average balance of student borrowers in Nevada as of June 2020 was $34,700, according to the Federal Reserve Bank of New York.

Nevadans with student debt have a consistently high rate of defaulting on their loans, which occurs after a certain period of missed payments. Once borrowers default, they immediately owe their entire balance of debt, their credit ratings are tanked, and the government often garnishes their wages or withholds Social Security benefits to make up for the unpaid cost of the loan.

In Nevada as of December 2020, according to Urban Institute data, 14 percent of all student loan holders were in default. The rate of default among nonwhite student loan holders, though, was 20 percent—double the rate of default among white student loan holders alone.

People of color are disadvantaged at each stage: less likely to have accumulated the wealth to afford college, they borrow, then enter an economy rife with racial bias, and are often targeted by for-profit institutions to continue their education, according to Brookings.

Borrowers’ difficulties repaying their loans are only magnified by the private companies which intermediate between borrowers and lenders. Both the federal government and private lenders rely on these third-party “servicers” to collect and process loan payments and manage repayment plans. In other words, the federal government, which provides the majority of loans, does not publicly manage loan repayment, but outsources it to the private sector. A central component of AB 382 attempts to rein in those third-party servicers.

Lukithia George, a Nevadan who testified in support at the April hearing, took out a loan of $12,000 ten years ago and now owes $30,000. 

“No one explained to me the amount of interest I would realistically be paying,” George said, calling into the hearing. The private company servicing her loan failed to inform her about her various repayment options which could have incurred a lower interest rate, or dissuaded her from borrowing altogether.

She wasn’t even able to finish her last semester of the degree, because of a change in her financial aid situation, leaving her with only the burden of debt. Among those who take out loans, around 4 in 10 students do not finish college within six years.

Bonnie Latreille, Director of Research and Advocacy at the Student Borrower Protection Center, told lawmakers of a Nevadan whose loan services auto-debited his payment twice due to what the company called a “technical glitch,” overdrawing his account by thousands of dollars. The company still hasn’t refunded the money.

Servicers have received national attention for routinely misleading borrowers, making errors, and steering borrowers to higher-cost plans. In 2017, the Consumer Financial Protection Bureau sued giant national servicer Navient for “systematically and illegally failing borrowers at every stage of repayment.” The Education Department, which runs Federal Student Aid, has been accused of inadequately overseeing its servicers.

Amidst federal inaction, states have, especially over the last five years, begun trying to regulate student debt themselves.

“This bill is about making sure that when more than 300,000 Nevadans go to make their student loan payment, they have the same rights they would have if they were paying their mortgage or their credit card.” Latreille said in her testimony supporting Nevada’s bill.

Notably, the Nevada bill goes beyond many traditional Borrowers’ Bills of Rights to regulate not only the servicers—the private entities in the middle of borrower and lender—but also the roughly 8 percent of all lenders which are private.

‘Nothing about…student loan forgiveness’

Private student loans are the “wild west of consumer finance,” Seth Frotman, executive director of the Student Borrower Protection Center said. Private lenders offer fewer protections and less flexibility than the federal government does, with shorter default periods and higher interest rates, and borrowers have no right to any of the federal government’s affordable repayment options, like public service loan forgiveness. 

One federal protection that private borrowers currently lack is “total and permanent disability discharge,” the federal rule that releases borrowers and cosigners from student loans when the borrower becomes medically unable to earn income. The Nevada bill changes that, mandating that private lenders in the state adopt that rule, too, if they want to be licensed to operate here.

The bill’s relatively expansive protections set Nevada apart; what also sets Nevada apart is that the Legislature hasn’t considered policies targeted towards those who already have debt.

“Nothing about this bill does anything around student loan forgiveness.” Watts said at the April hearing. “This bill does nothing to remove any borrowers’ obligations to repay the loans that they have incurred.”

All but three states have heard bills about debt forgiveness in the years 2015-2021 – along with Nevada, the exceptions are Louisiana, and South Dakota, according to the National Conference of State Legislatures’ Student Loan Bill Tracking database.

Loan forgiveness on the state level is hard to do: states must balance their budgets, while the federal government does not. But many states nonetheless have at least narrow loan forgiveness programs, or have investigated them in recent years.

In 2021, at least 17 states will consider legislation to forgive health care professionals’ debt, and 10 states to forgive educators’ debt, according to the National Conference of State Legislatures. Often these programs are targeted to retain a certain profession in the state, or attract them.

States also have successfully built on federal forgiveness programs. New York’s Get On Your Feet program supplements the federal government’s income-driven repayment plan, which lets borrowers pay a fixed portion of their income monthly and be relieved of the remaining debt after a fixed period of time. Maryland and Illinois have a program, SmartBuy, which helps borrowers purchase homes while forgiving their student loans.

Asked in an interview if he had considered legislation involving student loan forgiveness, Watts said no, adding “I think that it’s worth having a conversation on debt forgiveness but this bill does not relate to that topic.”

The bill largely targets future borrowers, protecting them from servicers’ and private lenders’ deceptive practices. But for those already saddled with debt, the bill might have a lesser impact than forgiveness programs would.

Nevadan Amy Williams, who testified in support of the bill despite the fact that it would not help ease her own family’s burden, said that if “honest marketing” had been in place for her husband, who accumulated $180,000 in student loans, he might have made “completely different choices” about taking out his loans.

“The anxiety around this has made me afraid to have my own children go into higher education,” Williams said. “I don’t want them to live with the same burden.”