Understanding The California Student Borrower Bill Of Rights

The new California Student Borrower Bill of Rights is bringing unprecedented protections for student loan borrowers living in California. 

The law, AB 376, was passed in conjunction with other consumer protections laws. In particular, the law gives California’s newly created Department of Financial Protection and Innovation the ability to govern loan servicers (including banks, credit unions, and even federal loan servicing companies).

This new legislation is a welcome step forward in much-needed student loan reform. Hopefully, other states will follow California's lead by strengthening their own student loan borrower protections. Here’s what California residents need to know about this new law.

What Is The California Student Borrower Bill of Rights?

The California Student Loan Borrower Bill of Rights is primarily a new consumer protection law. The California legislators deemed the law necessary due to a perceived lack of federal oversight for student loan servicers.

While the law is significant, it doesn’t erase debt, or change the terms of loans. Rather, it protects borrowers from loan servicing abuses that can make debt more expensive (or more difficult to discharge in the long run). In particular, it legally requires loan servicers to consistently act in the best interest of the borrowers.

It's robust legislation that makes it illegal for servicers to take advantage of a borrower's confusion or lack of knowledge of repayment options. In addition to barring abusive behaviors, the law establishes industry specific standards for student loan servicing. It also establishes the right to punitive damages if a servicer fails to comply with the new standards. 

With all these new standards, California’s student loan borrowers may start to make more headway on getting out of student loan debt. The law goes into effect on July 1, 2021.

Related: California Student Loan And Financial Programs

What New Provisions Does AB 376 Provide?

Provisions of the new law are broken into a few categories. The “Bill of Rights” establishes that servicers and lenders may not engage in abusive or predatory behaviors in regards to student loan borrowers.

Here are a few of the specific requirements that it sets:

• Servicers must provide accurate information about repayment options. Borrowers who could access flexible repayment options must be given accurate information about those options.
• Servicers must help borrowers avoid default. Whenever possible, borrowers must be given accurate information about income-based repayment plans or other flexible repayment options to avoid default.
• Servicers and lenders cannot omit important information. They must present all the important information about a loan and not misrepresent the infromation in any way.
• Servicers cannot take advantage of misunderstandings. They are required to work in the best interest of borrowers, even if it means missing out on profits.

The law also establishes the “rules of the road” or standard practices that lenders must follow to retain licensure in California. Some of these rules include:

• Servicers must process payments and other documents in a timely fashion. Payments that are received before midnight on the payment day should be marked as on time.
• Servicers must apply payments correctly. Under AB 376, servicers must apply payments in a way that minimizes fees, charges, and interest payments.
• Servicers must improve their record keeping. Many student loan servicers have a reputation for poor record management. These laws require servicers to keep their records up to date so borrowers can manage their payments appropriately.

Perhaps most importantly, the law provides consequences for servicers and lenders that break these rules. In particular, it provides an option for private lawsuits against student loan servicers.

Borrowers who believe their loan servicer has broken a law will have the right to sue the servicer for punitive damages. And, notably, this right extends to both private loan servicers and federal loan servicers.

How Can California Borrowers Benefit?

Borrowers who are current with their loans may notice a few subtle benefits from this law as servicers tighten up their practices. For example, overpayments should start to be applied in the best interest of the borrower (no more seeing 6 months of “prepaid” payments rather than a decrease in principal). And servicers may begin offering quicker responses and better answers when you call.

However, the real beneficiaries of this law will be borrowers struggling with loan repayment. Those borrowers should get clearer answers on how to avoid default. And they should receive useful information about repayment plans and loan forgiveness options when available.

Finally, borrowers who are misled about their options will have the option to sue their servicers for damages. This law will not be an excuse for borrowers to miss payments or mishandle their debt. Rather it will provide accountability for servicers to act in the best interest of borrowers.

Related: California Student Loan Forgiveness Programs

What's Next?

The California Student Borrower Bill of Rights will not go into effect until July 1, 2021. However, borrowers may begin to file complaints against loan servicers through California’s Department of Financial Protection and Innovation.

Complaints may also be filed with the Consumer Financial Protection Bureau (CFPB), Better Business Bureau (BBB), or at StudentAid.gov. For private action options, borrowers may want to enlist the help of a bankruptcy attorney.

If you want a second option to confirm that you're getting the right repayment advice from your servicer, consider hiring a CFA or CFP who specializes in student loans. We recommend The Student Loan Planner to help you put together a solid plan for your student loan debt.