Let’s stop treating student borrowers like second-class citizens

Because the word “student” comes before “loan,” we routinely treat consumers with student debt like second-class citizens. These borrowers face breakdowns and bad practices that we would simply never permit in any other market or from any other industry.

What does this look like in practice? 

{mosads}If you have a mortgage and your loan gets sold and lost, you have protections to ensure your credit does not get ruined and legal rights when things go wrong. If you have a student loan, you are left with little recourse.

If you have a credit card and you pay more than you owe in a month, your credit card company is required to make sure that payment is applied in a way that pays down your debt the fastest. If you have a student loan, your company can drag out the length of time you are in debt and maximize the amount of interest charged.

These are just two examples of the industry breakdowns that harm millions of borrowers each year. At the Consumer Financial Protection Bureau, where I served as the top student loan official until last year, we heard from borrowers across the country who ran into serious problems like these. 

This is the other side of our student debt crisis.

More than 44 million Americans now owe nearly $1.6 trillion in student debt. Federal and state law enforcement officials continue to uncover rampant illegal practices across the student loan market, hurting every type of student loan borrower, with every type of loan, at every stage of repayment. These practices add insult to injury for millions of borrowers already gasping for breath under the weight of this debt.

It is now clear that our nation’s consumer laws have failed to keep up with the explosion of student debt and distress, depriving borrowers of the rights and protections they need to stay afloat.

Fortunately, Sen. Dick Durbin (D-Ill.), Sen. Elizabeth Warren (D-Mass.) and Sen. Jack Reed (D-R.I.) have introduced legislation to protect borrowers. Their bill, the Student Loan Borrower Bill of Rights Act of 2019, updates federal consumer laws to cover student debt, the second-largest class of consumer debt in America.

This groundbreaking legislation will:

1. Set clear “rules of the road” for the student loan industry. This proposal gives all student loan borrowers the same clear, commonsense rights long guaranteed to consumers with mortgages and credit cards — covering private companies across the student loan industry, including banks like Wells Fargo and Sallie Mae and big government contractors like Navient.

It ensures that companies are held accountable for providing quality customer service, handling borrowers’ money in a way that serves their best financial interests and providing meaningful help to borrowers in distress.

2. Ensure independent oversight and enforcement. All student loan borrowers’ rights will be protected by independent regulators and enforcement officials at every level of government.

Independent regulation addresses the conflict of interest at the heart of the student loan system, separating the business of managing the trillion-dollar federal student loan portfolio from government’s duty to police bad practices by the industry.

This bill will also empower individual borrowers to take student loan companies to court if these rules are broken or if borrowers’ rights are denied. 

3. Improve practices at the U.S. Department of Education. The Education Department — the self-proclaimed “largest special purpose consumer bank in the world” — now owns more than $1.2 trillion in outstanding student debt, and its contractors dominate the student loan marketplace.

This legislation will give the Education Department a new mandate to get its own house in order — following warnings by watchdogs, law enforcement officials and Congress — bringing an end to a decade-long pattern of mismanagement and abuse. 

Together, this would mark a wholesale shift in the way the student loan system works — empowering student loan borrowers and demanding accountability from the industry. These sweeping new reforms are a first step to fixing a badly broken student loan system. 

Seth Frotman is executive director of the nonprofit Student Borrowers Protection Center and former student loan ombudsman for the Consumer Financial Protection Bureau.