Private Student Loan Borrower Bill of Rights Revealed

December 13, 2013

For far too long we’ve watched student loan debt pile up to record levels while borrowers fall further and further behind. We covered the rise in average balances earlier this week, noting that they’ve risen to an incredible $29,400. And with delinquencies on the rise and post-grad unemployment still lagging, this is a perfect storm of untenable debt. Finally someone is stepping in and advocating more staunchly for debtors and the student loan bill of rights proposed this week is a step in the right direction!

Senate Bill 1803 was proposed on Wednesday and promptly referred to committee for review. The bill was introduced by Illinois Democrat Senator Richard Durbin and is co-sponsored by fellow Democratic Senators Elizabeth Warren, Barbara Boxer and Jack Reed. All four have long advocated for awareness and assistance for troubled student loan debtors. Perhaps the proposed “Student Loan Borrower Bill of Rights” is exactly what’s needed.

A good portion of the bill concerns proposed regulations to improve servicing of student loans particularly for those borrowers that are struggling. The legislation would require loan servicers to give specific advice on repayment alternatives, loan consolidation to get lower interest rates, forbearance or deferment. Also included is a model disclosure form that loan servicers would be required to use to inform borrowers of repayment alternatives.

Here’s what’s contained in the actual Bill of Rights portion of the legislation:

#1 Sale, Transfer or Assignment

In case a private student loan is sold or transferred, the original servicer must send an easy-to-understand notice 45 days or more before the transfer. The notice must contain the name, address, phone number and website of the new servicer; effective date of the transfer; and the date when payments will transfer over to the new servicer.

Additionally, for 60 days after the transfer, the old servicer must forward any payment received to the new servicer who may not charge any late fees. The new servicer must also honor any promotions or benefits offered by the old servicer to the borrower.

#2 Material Change in Mailing Address or Procedure for Handling Payments

If a loan servicer makes a significant change in their mailing address or their payment processing procedures and it causes any delay in crediting student loan payments, the servicer may not assess any late fees or finance charges for the first 60 days after the change is implemented.

#3 Application of Payments

This one is really interesting. When the servicer receives a payment, it will be applied first to interest and fees owed for the current due date and then to the principal due on the highest interest rate loan. Payments will be applied in this manner from highest to lowest interest rate loans owed by the borrower until the amount of the payment is exhausted. This will hold true unless the borrower requests payments to be applied in another manner.

If the payment remitted is in excess of the minimum payment due and after application of the minimum payment due, there are still interest and fees due for that period, the excess will be applied first to interest and fees from the highest interest rate loan. (This would happen if the borrower was on a payment plan where their monthly payment did not cover the full cost of the interest accrued that month.)

Excess amounts after paying the rest of the interest and fees on the highest interest rate loan would go toward principal payment due for that installment. Any excess amounts after that would be applied in the same manner to the next highest interest rate loan until the payment amount is exhausted. Payments must be posted to the borrower’s account on the date the payment is received.

This section also allows for the Consumer Finance Protection Bureau (CFPB) to make rules governing application of payments to minimize fees and interest and minimize delinquencies.

CFPB is key to S 1803 provisions

Senate Bill 1803 hinges on CFPB participation
Image source: Debt.org

#5 Rehabilitation of Loans

This requires lenders to consider a loan rehabilitated if the borrower makes nine payments over a 10 month period all within 20 days of the due date. Once this is accomplished, the lender would have to remove the charge-off from the credit history of the borrower.

#6 Servicemembers and Veterans Liaison

This section of the Borrower Bill of Rights requires lenders to assign a specific employee to become knowledgeable on the Servicemembers Civil Relief Act (SCRA) and then act as liaison to answer questions from servicemembers and veterans on their student loans. The lender must also provide a dedicated toll-free number to allow servicemembers and vets direct access to the dedicated liaison. This phone number must be listed on the website and on monthly billing statements. Finally, lenders would not be able to charge-off, assign to collections, report as delinquent or report as charged-off or delinquent to a credit reporting agency for any servicemember on active duty in a combat zone.

#7 Borrower Loan History

Loan servicers would be required to make available on a secure website or in writing upon request the complete loan history for each separate loan that shows payment history, loan history, forbearances, deferrals, delinquencies, collections assignments, charge-offs, interest rate history, key loan terms, application of payments to interest, principal and fees, loan origination date, principal, capitalized interest, annual percentage rate, interest caps and any contract incentives.

The servicer must also make available at no charge copies of original loan documents and promissory notes for each individual private loan.

#8 Error Resolution

Under consultation with the Secretary of Education, the CFPB would be authorized to make rules on error resolution procedures so that borrowers can make inquiries about errors on their private student loans and obtain timely resolution of these issues.

#9 Additional Servicing Standards

The bill would also allow CFPB to establish servicing standards that would reduce delinquencies, collections assignments and charge-offs. They would work to ensure that borrowers understand rights and obligations associated with their educational debt.

#10 Arbitration

This section specifies that any rights and remedies available to borrowers may not be waived by any agreement, policy or form. It also blocks predispute arbitration for any disputes arising from violations that occur after the Borrower Bill of Rights is enacted.

These are the major points of the Borrower Bill of Rights proposed and they are all beneficial to borrowers, while not being unfair or prejudicial against private student loan servicers and lenders. Click to read the full text of the legislation.

And to make sure you stay on track with your federal and private student loans, sign up with Tuition.io for our free student loan tool which allows you to monitor your federal and private loans, see your payments, explore repayment options and optimize your debt. Be sure to read our blog for news and tips on student loans and to track new on important legislation like the Student Loan Borrower Bill of Rights.