Minnesota expands protections for student loan borrowers as payment pause nears end

Student loan borrowers in Minnesota who are anxiously awaiting the end of a three-year federal pause on payments will soon have a state ombudsperson to advocate on their behalf.

The creation of a student loan ombudsperson position within the Department of Commerce is the latest step taken by the Minnesota Legislature to protect borrowers. Lawmakers passed a "bill of rights" for borrowers in 2021 that, among many things, required student loan servicers operating here to be licensed by the Commerce Department and consider income-driven repayment plans before placing a borrower into default.

"Minnesota has some of the highest borrowing rates in the country for student loans, and so I think that this is desperately needed," Mike Dean, executive director of the community college student association LeadMN, said of the new advocate position. "I think this moves us as sort of a national leader when it comes to protecting the rights of student loan borrowers."

The ombudsperson role comes at a critical time, Dean said, noting the U.S. Supreme Court's impending decision on whether to strike down President Joe Biden's student loan forgiveness plan. The federal pause on payments is scheduled to end this fall; student loan interest will begin accruing again on Sept. 1 and payments will be due in October.

"The concern that we have is once those payments resume, that will really have a negative impact on their checkbook and will potentially push many people into default," Dean said.

Minnesota bachelor's degree recipients carried an average of nearly $24,000 in debt in 2021, according to the state Office of Higher Education. Those who earned associate degrees that year had an average debt of about $15,000.

Commerce officials say the new advocate will help resolve disputes between borrowers and loan servicers, which they expect to become more common once payments resume.

Jacqueline Olson, the department's assistant commissioner of enforcement, said the ombudsperson — who hasn't yet been hired — will analyze and compile data about complaints they receive from borrowers. They also will work with borrowers to help them understand their rights and loan terms.

Other duties of the ombudsperson will include promoting awareness about the issues that student loan borrowers encounter, and creating a borrower education course that students can take before accepting loans.

"It's a big job," Olson said. "I think it's going to be really helpful for Minnesota consumers … to have that person."

Minnesota is among just a handful of states that have established such a role as well as a student loan borrower bill of rights.

Since etching the borrower bill of rights into law, Minnesota has seen "better outcomes for people's credit," said Mark Hastie, the Commerce Department's director of non-depository financial institutions.

More Minnesotans have been evaluated for income-driven repayment plans instead of going into forbearance or default, he said. Loan service providers are also required to respond to borrower inquiries within a certain timeframe and notify people if their loan is being transferred to another servicer, Hastie said, adding that the companies are now being held "much more accountable."

The state commerce commissioner can suspend or revoke the licenses of servicers that mislead borrowers.

"It puts the servicer on the spot," Hastie said.

Addressing the larger problem

In addition to the borrower protection measures, Minnesota legislators are also trying to keep college students from taking on too much debt in the first place.

The higher education spending bill they passed last month created a free public college tuition program for Minnesota students whose families make less than $80,000 annually.

A separate provision in the bill provides funding to cover tuition and fees for eligible American Indian students attending the state's public colleges or universities.

In the coming years, Dean said he hopes lawmakers will consider expanding the free college tuition program to include more Minnesotans above the set income threshold. He said the current program is a "Band-Aid on the much larger student debt problem."

"We saw the Legislature take a huge step forward … but there are still folks that are in that donut hole, that are not wealthy enough where mom and dad can pay for school but unfortunately do not qualify," Dean said. "We really need to expand that program to make sure all middle-income families are eligible for free college."