On August 2, 2024, the Illinois governor signed SB 86 into law to amend the Illinois Know Before You Owe Private Education Loan Act and the Illinois Student Loan Servicing Rights Act. Establishing new requirements that will impact student loan lenders and student loan servicers operating in Illinois, SB 86 became effective immediately upon becoming law.
Know Before You Owe Private Education Loan Act Amendments
Illinois SB 86 amends the Know Before You Owe Private Education Loan Act (Know Before You Owe), which governs private educational lenders extending private education loans in Illinois. SB 86 expands the scope of Know Before You Owe by adding a definition of who is considered a co-signer[1] and extends several borrower-specific protections to such co-signers. For example, the law only required a lender to provide loan statements to borrowers while in school, but lenders must now also provide any co-signer with a copy of the loan statements. SB 86 also establishes a new co-signer disclosure that a private education lender must provide to co-signers before extending a private education loan that describes the co-signer’s potential liability, credit reporting impact, and co-signer release eligibility standards.
In addition to the co-signer-specific changes, SB 86 amends Know Before You Owe to require a private education lender to provide a specific disclosure when extending a loan used to refinance an existing student loan. As a result, private education lenders operating in Illinois must now change their loan origination documentation and servicing systems to comply with these new requirements.
Student Loan Servicing Rights Act Amendments
SB 86 also amends the Student Loan Servicing Rights Act (SLSRA), which governs student loan servicing in Illinois. The law creates new requirements that will necessitate significant operational changes for student loan servicers and indirectly impact lenders by regulating co-signer release eligibility standards. In addition, SB 86 establishes new co-signer[2] release requirements, creates new servicer responsibilities, establishes new borrower and co-signer appeal rights, and limits when a servicer can accelerate a loan or declare a loan in default, among other notable requirements and restrictions.
Co-signer Release Eligibility and Requests
SB 86 creates new co-signer release requests and notices requirements. A servicer must now provide the borrower and co-signer with an annual written notice that describes co-signer release rights. Servicers will also need to proactively notify the borrower if he or she has met the payment requirement to be eligible for a co-signer release. Servicers must also follow certain operational requirements regarding co-signer release, including requirements to notify a borrower if the release application is incomplete and to maintain specific records regarding co-signer releases. In addition, a servicer must allow a borrower to request an appeal if an application for a co-signer release is denied.
With respect to loans originated after August 2, 2024, a servicer cannot require proof of more than 12 consecutive on-time payments as part of the co-signer release criteria. Illinois has adopted a novel rule that disregards the on-time standard. A borrower will be able to make a single lump sum payment that is equivalent to 12 months of principal and interest, even if the borrower has not made monthly payments or otherwise demonstrated an ability to make ongoing, regular payments. The amended law also requires servicers to implement new borrower and co-signer release rules if either party has submitted evidence of total and permanent disability.
New Servicer Responsibilities
SB 86 amends the SLSRA to provide new responsibilities for servicers with respect to modified or flexible repayment options. For example, a servicer now must provide a description of any modified or flexible repayment options offered by the lender on its website and offer the same modified repayment options to all borrowers with similar financial circumstances. In addition, a servicer may not place a loan in default or accelerate a loan while a borrower is seeking a loan modification or enrollment in a modified or flexible repayment plan (until a loan is 90 days or more in default). SB 86 also requires servicers to establish policies and procedures regarding such repayment plans.
New Co-signer and Borrower Rights
SB 86 establishes a new comprehensive list of co-signer and borrower rights. Notably, for loans executed on or after August 2, 2024, a servicer may not include a provision in a loan that permits the servicer to accelerate payments for any reason except upon a payment default. The practical impact of this new prohibition is unclear as a servicer is not the party that enters into a loan agreement with a borrower and cannot control the terms of a note originated by others. In addition, servicers may only accelerate loans originated before August 2, 2024, if the loan agreement explicitly authorizes acceleration and only for the specific reasons provided in the agreement. Under these newly established rights, a co-signer is also entitled to access all documents or records that are available to the borrower.
SB 86 further limits how and when a servicer may attempt to collect upon the death of a co-signer. If a co-signer dies, a servicer may only attempt to collect against the co-signer’s estate for a payment default. Moreover, in the event of bankruptcy or death of a co-signer, the law restricts the servicer’s ability to change any terms, benefits, or any other provision associated with the loan.
Private education lenders will need to carefully review SB 86 and consider necessary revisions to their loan application process to address refinance loans and develop a process to ensure co-signers receive certain information that previously was only provided to borrowers. Servicers will also need to study the amendments to the SLSRA and address the new website requirements, co-signer release rules, and servicing limitations. Because of the immediate effective date of this law, student lenders and servicers should ensure that their operational systems are updated as soon as possible to comply with these amendments.
[1] SB 86 defined “co-signer” under Know Before You Owe to mean “any individual who is liable for the obligation of another without compensation, regardless of how the individual is designated in the contract or instrument with respect to that obligation, including an obligation under a private education loan extended to consolidate a borrower’s preexisting student loans. The term includes any individual whose signature is requested, as a condition, to grant credit or to forbear on collection. The term does not include a spouse of an individual if the spouse’s signature is needed solely to perfect the security interest in a loan.”
[2] SB 86 amends the SLSRA to revise the definition a “co-signer.” Before the amendment, “co-signer” was defined to mean “a person who has agreed to share responsibility for repaying a student loan with a borrower.” SB 86 removes this definition and replaces it with the same definition for “co-signer” provided above under Know Before You Owe.
