California Proposes New Student Loan Bill (AB-223)

New Student Loan Bill in California

Student loan debt in the United States is now over $1 trillion dollars. This massive debt load is compounded by falling wages for new graduates who struggle to find empolyment that matches their level of education. Those graduates that do find work are often underemployed. College students in California graduate bogged down bystudent loans with an average debt load of almost $19,000.[i] In California, 21.7% of college graduates under the age of 25 are unemployed and 36.3% are either working at a job that does not require a college degree or have given up looking for work.[ii] Not only do these students have large debts, they make too little to pay them back. Missed payments and default are common, triggering the collection process. Debt collectors start calling, tax refunds are intercepted, and wages are garnished in an attempt to collect payment on the debt.

A new law (AB-223) proposed by Assembly Member Bob Wieckowski (D) seeks to alleviate some of the debt burden on new college graduates with a bill that will prohibit wage garnishment for private student loans. The law passed the Assembly in April and now awaits action in the Senate. Assembly Member Wieckowski believes that this measure will encourage private lenders to work with debtors in default to establish manageable payment plans. Proponents of the bill claim that it will help alleviate some of the burden on the working poor. Opponents argue that the bill will decrease the availability of private loans to prospective college students, meaning that fewer students will be able to attend college. The bill only applies to private student debt collection, so the majority of student loans (85% of all student loans are federal) will not be affected.

What is wage garnishment?

A collector can obtain a judgment against you for defaulting on your private student loan. The collector will then contact your employer, who is required by law to withhold up to 25% of your disposable income (everything above your basic living expenses) for the purpose of paying back the loan.

What does the new Student Loan Bill change?

Under the new bill, wage garnishment is still an option for the collection of your federal student loan, but can no longer be used to collect private loans. The bill does not forgive the debt – it just limits the ways private lenders can collect.

What is the difference between private and federal student loans?

Private student loans originate with a bank or other lender and federal student loans are made and guaranteed by the federal government. Federal student loans for undergraduates have a flat interest rate of 3.4%.[iii] Private loans, on the other hand, have interest rates that vary based on the borrower’s credit. Students can only borrow a certain amount in federal student loans regardless of which school they are attending; private loans have no such ceiling. They are, in theory, limited to the net college cost. Most lenders contact the school to confirm the enrollment of the student and the costs, but they are not required by law to do so.

What does it mean to default on student loans?

Failure to make a payment for 120 days is generally considered a default on a private student loan. This can vary from loan to loan; you should look at the terms of your particular loan to determine what will qualify as a default.  Federal student loans are considered to be in default after 270 days of nonpayment. Loans that are delinquent, or late by more than 90 days, will be reported to the major credit bureaus, affecting your credit score.

What happens if I default?

Private and federal student loans differ in the process of collection in the event of default. Federal student loans can be reorganized in several ways, including Income-Based Repayment plans, unemployment deferent, and loan forgiveness programs. The federal government can also garnish your wages and intercept your state and federal tax returns to collect the debt.

Currently, private lenders can contact you through phone calls and letters or pursue a judgment against you in court. When they receive a judgment, they can then contact your employer and garnish your wages. Under the new bill, this would no longer be an option. Private lenders will be limited to contacting you directly or suing you. In California, collection practices are governed by Fair Debt Collection Practices Act (FDCPA), which prohibits debt collectors from harassing the debtor.

Unlike other kinds of debt, student loan debt cannot usually be discharged in bankruptcy.

How will this affect me?

The new law would apply to all wage garnishment orders in California issued on or after January 1, 2014. If you have private student loans and are currently in delinquency or default, your creditor may attempt to garnish your wages as soon as possible to beat that deadline. Contact an attorney to learn what options you have to get out of default. If you have only federal student loans, the new law will not affect you.