Chalk one up for the state Legislature and its timing earlier this year when it established a student loan bill of rights.
Mick Mulvaney, interim director of the federal Consumer Financial Protection Bureau, is continuing the ill-advised dismantling of the agency, last week announcing that the CFPB department tasked with enforcement and rule-making regarding student loans was being moved into the bureau’s office of financial education.
“It’s an incredibly clever and sneaky move,” Christopher Peterson, a University of Utah law professor and former enforcement attorney at the CFPB, told The Washington Post, as it removes the agency’s ability to protect student loan borrowers from predatory lenders and loan servicers.
The action turns a watchdog — one that had returned to student loan borrowers more than $750 million paid under predatory circumstances since the agency was created in 2010 — into a dispensary for information on financial literacy. There’s nothing wrong with encouraging good fiscal habits and educating students and young adults, but the CFPB’s role as an advocate for borrowers is desperately needed in a landscape where student debt has surpassed $1.5 trillion and there are more than a few examples of predatory behavior by lenders and loan servicers, including the nation’s largest student loan servicer, Navient.
Witness the lawsuit filed last year by Washington state Attorney General Bob Ferguson against Navient Corp., formerly known as Sallie Mae. The Washington state lawsuit, joined by Illinois’ attorney general and the CFPB — prior to Mulvaney’s appointment — accused Navient of unfair and deceptive practices including steering financially distressed student loan borrowers into short-term forebearances, rather than repayment programs based on borrowers’ incomes, engaging in aggressive and misleading collection practices and other predatory practices.
Granting forbearance to some borrowers — allowing some to suspend their monthly payments — might sound like a good option for borrowers, except that it allows the interest to accrue during the grace period, then applies it to the principal, in effect, making borrowers pay interest on their interest. It can be a good short term option, but not for borrowers struggling to repay loans over a longer term of financial difficulty.
The lawsuit also charged that while operating as Sallie Mae, Navient made predatory loans to students attending for-profit colleges that had graduation rates lower than 50 percent and were making inflated claims about finding jobs after graduation, which should have raised doubts about students’ ability to repay the loans.
State lawmakers likely weren’t anticipating Mulvaney’s actions; the legislation had been request by the Attorney General’s office and proposed even before undoing the CFPB was a glimmer in Mulvaney’s eye. But the timing is fortunate, all the same. The actions of the Legislature earlier this year to establish a student loan bill of rights provides many of the same protections that are being lost at the CFPB.
The state law, which received substantial and bipartisan support from the state Senate and House and goes into effect June 7, requires student loan servicers to be licensed by the state and creates a student-loan advocacy officer responsible for receiving and reviewing complaints from borrowers and referring them to the state Department of Financial Institutions or the state Office of the Attorney General.
The state law and similar laws recently passed in California, Illinois and Connecticut are likely to be challenged by the federal government. In March, the federal Department of Education issued a notice in the Federal Register that warned that federal law preempted the state laws, The Seattle Times reported.
But that challenge has yet to be filed and won’t be resolved by the courts immediately, leaving the state’s student loan bill of rights to assume the watchdog role.
Of that $1.5 trillion in U.S. student loan debt, about $24.4 billion is owed by about 800,000 state residents. Those are significant numbers that justify the state looking after the interests of its residents, especially when the current federal administration has abdicated its responsibility and has cast its favor behind the money lenders.
Clarification: The editorial has been changed from an earlier version to clarify the practice of forebearance.