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March 11, 2018

Summary

On Friday, March 9, the U.S. Department of Education released a notice to stop states from regulating federal student loan servicers. The notice states, “Recently, several States have enacted regulatory regimes or applied existing State consumer protection statutes that undermine these goals by imposing new regulatory requirements on the Department’s Direct Loan servicers, including State licensure to service Federal student loans.” The notice also states that the federal government is the only entity that has the authority to provide oversight to their contractors.

The notice specifically names a Massachusetts lawsuit filed by state Attorney General Maura Healey, against the Pennsylvania Higher Education Assistance Agency, commonly known as FedLoan Servicing, as an example of states overstepping federal authority. The federal government intervened on behalf of the loan servicer in this case although it is still ongoing.

Other states that have implemented their own regulations include California, Connecticut and the District of Columbia; they all require federal student loan servicers to obtain a license to operate in the state, meaning the state’s local agencies have the authority to monitor and investigate the loan servicers. New York, New Jersey, and Illinois are in the process of implementing similar practices. 

Analysis

The Department of Education’s federal student loan servicers handle roughly $1 trillion in student loan debt. Between September of 2016 and August of 2017, the Consumer Financial Protection Bureau received 12,900 complaints about these student loans; over 9,000 of these complaints were directly related to loan servicer issues. These complaints are why states have been implementing their own regulations to monitor federal student loan servicers.

In October of 2017, 25 state attorneys general sent a letter to Education Secretary Betsy DeVos, defending their right to protect their residents from the “fraudulent and abusive practices” of student loan servicers. The letter signed by Democrat and Republican attorneys general alike states, “State enforcement agencies have long been at the frontlines in protecting their citizens from fraud, deceptive conduct; and unfair business practices, including by financial service companies, debt collectors, and others. Indeed, such actions reflect fundamental states’ rights and fall squarely within the historic police powers reserved to the states.”

In response to the Department of Education’s new notice, many of the attorney generals that signed the letter spoke out against the notice. California Attorney General Xavier Becerra said in a tweet addressed to Betsy DeVos, “Betsy Devos, with today’s announcement, is attempting to exempt private contractors that service federal student loans from complying with state law. This is suspicious, unprecedented & most importantly, without any legal basis under federal law.”

Massachusetts Attorney General Maura Healey also tweeted about the new notice. “Secretary DeVos can write as many love letters to the student loan industry as she wants, we will not shut down our investigations or stand by while these companies rip off students and families.”

The National Consumer Law Center also released a press release in response to the new notice.  In the press release Persis Yu, a staff attorney and director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, said, “Servicers and collectors who mistreat student loan borrowers and steer them into inappropriate payment plans should not be above the law. . . States have a critical role to play in protecting student loan borrowers. With the Education Department inappropriately siding with servicers over borrowers, the role of states is now more critical than ever.”

Meanwhile, organizations representing student loan servicers, are pleased with the contents of the notice. The Student Loan Servicing Alliance, a non-profit, membership organization of student loan servicers and software providers in the Federal Family Education Loan Program and Federal Direct Loan Program, also released a press release in response to the notice. In the release they say, “The Department’s guidance is not just good law, it is good policy. Clear, uniform student loan servicing guidance from the federal government will help borrowers avoid the frustrations of an inconsistent patchwork of policies from individual states.”

There is currently no law that explicitly states the Department of Education has the authority to stop states from regulating student loan servicers. This notice will likely go to the courts to determine who has legal authority to regulate federal student loan servicers. 

Engagement Resources

  • National Consumer Law Center—A nonprofit that works with other nonprofits, legal services organizations, private attorneys, policymakers, and federal and state government and courts to stop exploitative practices.
  • Student Debt Crisis—A nonprofit dedicated to reforming student debt and higher education loan policies.

This brief was compiled by Rebecca Leclerc. If you have comments or want to add the name of your organization to this brief please contact, rebecca@usresistnews.org.


 

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