NJ Spotlight

Lawmakers Approve Oversight For Companies Servicing Student Loans

Retracing a step to help state residents get out from under a mountain of debt, now estimated at $43B

NJ Spotlight — June 7, 2019

By Carly Sitrin

State lawmakers have again taken aim at the growing student-debt crisis in New Jersey, releasing a bill that former Gov. Chris Christie let die when he left office.

The Assembly Higher Education Committee on Thursday passed S-1149/A-455 which would establish a student-loan ombudsman within the state Department of Banking and Insurance (DOBI). It would give DOBI the power to enforce state standards on loan servicers who manage and collect student debt and to fine violators who give students conflicting, inconsistent or inaccurate information.

The measure passed with seven "yes" votes and one abstention and will now head to the floor of both houses for a full vote.

"This bill and iterations of it have been in the works for years," bill sponsor Assemblyman Gary Schaer (D-Bergen/Passaic) said. "We're all aware there have been many horror stories that have come across our desks in terms of young people and sometimes their parents ... having received misinformation. Students have nowhere to turn to understand what exactly they're doing and how it is being done."

Pocket veto killed earlier version of bill

An earlier version of the bill was passed by the Legislature in 2018 in the wake of several hearings where students and parents criticized the New Jersey Higher Education Student Assistance Authority for practices lawmakers referred to as "predatory" and "loan sharking." That measure made it to Christie's desk but was pocket vetoed as he made his exit.

In the next year, student debt grew in New Jersey by more than $3.2 billion, according to data from the advocacy group New Jersey Citizen Action. And now, New Jersey student borrowers owe on average $38,876 each. By the end of 2018, 1.1 million New Jersey students had $43 billion in student debt, which lawmakers said has kept young residents from contributing to the state's economy by buying homes and starting families.

This bill, in concert with two measures Murphy signed into law in April, seeks to lessen the burden on students struggling to repay their NJCLASS debts. The measure would allow the state to exercise oversight power on all loan servicers operating in the state although some, including HESAA, have their own compliance processes in place already.

"Careless, or unscrupulous loans servicers are too often at the root of repayment problems for student borrowers," said Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, in testimony Thursday.

She cited several reports from by the Consumer Financial Protection Bureau and Center for Responsible Lending that found student loan servicers "consistently failed to put borrowers into income-based repayment plans for which they qualify, misapplied payments, reported incorrect information to credit bureaus, and placed borrowers in forbearance, or plans that caused their debt to balloon, which can lead to delinquencies and defaults."

The bill is sponsored by Schaer and fellow Assembly Democrats, Annette Quijano (Union), Raj Mukherji (Hudson), Jamel Holley (Union) and Joseph Danielsen (Middlesex, Somerset).

What the bill would do

Student borrowers who have any questions about their loans — from minor matters like how to change an address, to daunting challenges like how to get help if they're in danger of default — must go through a student loan servicer, private-sector companies that handle as much as $400 billion in debt. Because some are so massive, borrowers have increasingly gotten lost in the shuffle, advocates say.

Seth Frotman, the executive director of the nonprofit Student Borrower Protection Center and the former top student-loan official at the federal Consumer Financial Protection Bureau, said it usually plays out like this: A borrower reaches out for help with their loans and gets bad information, conflicting information, or no information at all. This can lead to serious ramifications where borrowers accrue thousands of dollars in added interest or take out new loans without fully understanding how the process works.

The Office of Student Loan Ombudsman envisioned under the bill would provide resources for borrowers to understand their rights and responsibilities in repaying what they owe. According to the bill text, the ombudsman will act as a communication bridge between borrowers and servicers to mediate grievances, address concerns and provide information about the student-loan process. Another core function will be to act as a watchdog to monitor implementation of state student-loan policies and hold servicers accountable.

In terms of accountability, the measure will establish regulations that will be imposed on student loan servicers, and require that all operating within the state are licensed by DOBI. It would apply to the dozens of private loan servicers operating nationally. State or federally chartered banks, savings banks, savings and loan associations, and credit unions would be exempt from the licensure requirement.

But is it needed?

Assemblyman Michael Patrick Carroll (R-Morris), the one abstention, repeatedly asked those testifying Thursday about whether the bill was necessary.

"How does present New Jersey law not handle these cheaters?" Carroll asked Frotman. He also noted that a vast majority of the student-loan debt in the state comes from federal loans and subject to federal regulations, so there may not be much the state can do.

Frotman replied that indeed, the federal government makes nine out of every 10 loans in the nation. Of the $1.6 trillion in national student debt, $1.4 trillion is from federal loans, he said. However, "if you have a problem and you pick up the phone, you're not talking to a Department of Education employee, you're talking to a private-sector company," he noted. And their massive size can make getting accurate and timely information difficult for individual borrowers, he said. There is also little oversight of these companies on the state and federal level.

The state's role then becomes, as Frotman put it, "to use traditional state police powers to oversee the health and financial wellness and financial future" of New Jersey residents.

"This isn't a new concept," he added. "New Jersey already oversees mortgage lenders, debt adjusters, check cashers and more."

Adding to the state's options

DOBI does not currently have the authority to conduct what are known as examinations of student loan companies, the way it does with other lenders.

As it stands now, New Jersey has limited ways to ensure that student-loan servicers comply with federal and state consumer-protections laws. The state Attorney General can bring a lawsuit, launch an investigation or attempt to reach a settlement with an offending firm. Advocates hope this measure will add an important, regulatory weapon to the state's arsenal for holding lenders accountable.

Lawmakers, advocates, and three students who testified did note however that ameliorating the student-debt crisis will take much more than this bill. Carroll, the Morris County Republican, said colleges and universities should start looking at ways to cut costs such as limiting athletic budgets, reducing administrator pay, and restricting hidden student fees.

But Frotman said the measure is "crucial" to giving the state the power it needs to protect its residents.

"This bill would make sure that New Jersey is using all of the tools at its disposal and isn't fighting the student debt crisis with one hand behind its back," he said.

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