Untapped Tools : The Power of State Debt Collection Laws to Protect Student Loan Borrowers

Many borrowers with federal student loans also carry balances on loans owed to private companies. Students take out private loans to cover the cost of education, to pay for living expenses while in school, and in response to aggressive marketing by for-profit schools and private lenders. Unlike federal student loans which are eligible for loan forgiveness based on disability, public service, and other discharges like the borrower defense to repayment, private student loans haunt borrowers for decades and there is little recourse for consumers. Private student loans have high interest rates, sometimes in the double digits, which means that by the time a borrower has defaulted, she may owe more than she originally borrowed. This will certainly be true if a borrower has trouble finding a job that pays enough to make monthly payments on the private student loan before and in the lead up to default, as is often the case for graduates of for-profit schools. Private student loans are not equally distributed across those who have attended post-secondary schools. Private student lenders have historically targeted low-income and non-white students, including hose attending for-profit colleges and trade schools, which makes addressing the outstanding balances carried by borrowers of private student loans both an economic and racial justice issue across the United States. States can provide protections for low-income borrowers and rein in student loan creditors that seek to profit off students who could not afford to repay loans in the first place through legislation that protects student loan borrowers during the debt collection stages of student loan collection. Although some state attempts to pass new laws targeting abuses in origination and servicing of private student loans may be preempted by federal banking regulations, an underutilized tool of states in protecting consumers is the authority to regulate debt collectors that use state courts to obtain and enforce civil judgments.This policy paper utilizes an empirical analysis of the filing and outcome of private student debt collection cases in California as an example of how state courts function as a tool of debt collection for private student loan lenders, servicers, and investors. The study period encompasses twelve years and analyzes the case outcomes and post-judgment collection activity for almost 15,000 student loan borrowers who were sued to collect old debts. Unlike many other kinds of consumer debt, the data shows that student loan creditors do not tend to sell defaulted debt to third-party debt collectors, but instead retain title to the debts and reduce them to judgment