Senator Clinton Introduces Student Borrower Bill of Rights

August 1, 2006

Author: Kirsten E. Keefe

On May 26, 2006, Senator Hilary Rodham Clinton introduced the “Student Borrower Bill of Rights Act of 2006” (S.3255).  According to findings set forth in the Bill, between 1994 and 2005, student loan borrowing increased a staggering 76 percent.  Acknowledging that college education is becoming increasingly important for getting higher-paying jobs, and that there has been a dramatic growing dependence on private credit sources by students to fund their education, Senator Clinton introduced this strong consumer legislation to provide borrowers with the most basic necessary protections.

The Bill applies to private and public lenders, insurers, guarantors, and servicers of student loans.  Five categories of “borrower’s rights” are established. Highlights of each of the “rights” include:

A Right To Shop In A Free Marketplace – Student loan debt consolidation will be made easier, and borrowers will be allowed to re-consolidate.  The Bill encourage greater competition in the student loan marketplace by including enhanced reporting requirements to credit reporting agencies regarding student loans, and allows borrowers to consolidate, and reconsolidate, student loans with a lender of their choice.

A Right To Timely Information About Loans -  A monthly bill must be sent to the borrower with clear notice including the principal, current balance, amount paid in interest to date, amount of additional interest expected to be paid over life of loan, the total amount borrower has paid, a description of all fees, and contact information for the lender/servicer, as well as the total amount of the payment and date due, among other things.  Also, the Bill requires that proper notice must be given by both the old and new servicer when servicing changes and that a 60 day grace period post-transfer be given, should a payment be sent to the incorrect party.

A Right To Make Affordable Loan Payments – Provides payments shall not exceed 10 or 20 percent of income, depending on income level.  If Income Contingent payment does not cover all interest, then the federal government shall pay the difference.  A study is encouraged under the Bill to examine what additional protections may be necessary to ensure that monthly payment amounts for different incomes are affordable, including examining payments required of students borrowing in other countries such as England and Australia.  The Bill also reinstates ability to discharge student loans through bankruptcy after seven years,1 and expands the current narrow definition of “disability” in order to receive a discharge from the Department of Education.2

A Right For Interest Rates and Fees To Be Reasonable – The Department of Education is encouraged to study interest rate and fees charged to borrowers of private student loans.  The Bill caps the total amount of fees that can be charged for the collection of a defaulted student loan, as well as the total amount that can be charged to a borrower, including all interest as fees, as a percentage of the original loan amount.

A Right To Not Be Exploited – Requires schools to disclose group level job placement of graduates, as well as, graduation rates and default rates of students.  The Bill allows administrative review for violations of the Higher Education Act and makes schools potentially liable for violations of the Higher Education Act.

While the likelihood of passage of S.3255 in this Congress is not great (and no companion bill has been introduced in the House or Representatives), it is still a very significant and important piece of legislation.  The Bill formally recognizes many of the problems that student borrowers have been complaining about including unaffordable and abusive loan terms, being steered into higher priced loans, poor servicing and an overall confusion with the lending process.  Senator Clinton’s proposals for consumer-friendly resolutions – some of which read like basic common sense – are long overdue in the student loan arena.

Senators Barbara Boxer (CA), Mary L. Landrieu (LA), Barbara A. Mikulski (MD), John F. Kerry (MA) and Joseph I. Lieberman (CT) have signed on as co-sponsors.  A copy of S.3255 can be downloaded off of Thomas (Library of Congress) at http://thomas.loc.gov/.  For more information about the S.3255, contact Greg Walton or Mildred Otero in Senator Clinton’s Washington, D.C. office at (202) 224-4451.3

A group of NYS Advocates plans to send a letter to Senator Clinton thanking her for introducing the bill and lending their support, and a letter to Senator Schumer asking him to co-sponsor the bill.  (Some advocates will sign-on in their individual capacities.)  If you or your agency is interested in signing onto this letter, please contact Kirsten Keefe of Empire Justice Center at kkeefe@empirejustice.org or (518) 462-6831. 

End Notes

1 Prior to 1996, student loans could be discharged through bankruptcy after seven years.  Currently, a debtor must prove the debt is an “undue hardship” in order for student debt to be discharged which has become a nearly impossible standard for debtors to meet.

2 Currently, borrowers must show that they are “totally and permanently disabled” to receive a disability discharge from the Department of Education.  This law would lessen that burden, defining disability as “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or has lasted, or can be expected to last, for a continuous period of not less than 60 months.”

3 For a comprehensive report regarding the current state of student loans in America, see No Way Out: Student Loans, Financial Distress, and the Need for Policy Reform, by Deanne Loonin, (June 2006) National Consumer Law Center (NCLC), available at http://www.nclc.org/action_agenda/student_loans/content/nowayout.pdf.
 

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