After Scaling Back Student Loan Regulations, Administration Tries to Stop State Efforts

WASHINGTON — After Education Secretary Betsy DeVos started scaling back consumer protections for student borrowers last year, six states and the District of Columbia sped up their own efforts to crack down on abusive lending practices by companies that administer federal loan programs.

Now DeVos is trying to stop them.

Trump administration lawyers filed a “statement of interest” last month supporting a lawsuit from the Student Loan Servicing Alliance, an industry trade group, against the District of Columbia for creating a student loan ombudsman office. Under a new city law, the companies would be required to apply for licenses and could lose their right to operate if officials determine they have engaged in fraudulent or irresponsible practices.

Administration lawyers accused the District of Columbia of trying “to second-guess” department officials in the selection of loan servicers, violating the supremacy clause in the Constitution in a case that could determine the future role of states in consumer protection.

“Federal loans are federal assets and therefore must be controlled and regulated by the federal government,” said Elizabeth Hill, a spokeswoman for DeVos. She described the actions of the states as an illegal veto of federal authority.

“A piecemeal, state-by-state approach to regulating federal assets causes confusion for borrowers and makes administration of the loan program more complicated and costly,” she added.

Soon after the move, after months of battling the administration’s deregulation agenda, the federal government’s top student consumer protection officer, Seth Frotman, resigned from his job at the Consumer Financial Protection Bureau.

In his resignation letter, Frotman called out his boss, Mick Mulvaney, the bureau’s interim director, for turning his back “on young people and their financial futures” by weakening enforcement.

But he was equally troubled by what the Education Department had done. Over the past several years, even before Donald Trump was elected president, Frotman barnstormed the country to encourage state officials to scrutinize the companies that are contracted by the department to manage the loan portfolio, collect debt from students and work out payment plans with delinquent borrowers.

And he raised concerns that the Education Department was withholding critical information on borrowers that is needed to bring enforcement actions against servicers, citing federal privacy laws.

“It was important for me to speak out,” Frotman wrote in an email.

“As state law enforcement officials and legislators across the political spectrum stand up for student loan borrowers who have been ripped off at every turn, Donald Trump and Betsy Devos have instead chosen to protect companies engaged in rampant illegal practices,” he added. “At stake is the financial future of millions of Americans and a trillion dollar black hole in our financial markets.”

Under DeVos, the department has loosened regulations on for-profit colleges that account for many student defaults and fraud allegations and killed a plan to introduce sweeping protections for borrowers released at the end of the Obama administration. In July, she proposed an overhaul of the department’s student loan oversight division that would cut an Obama-era debt relief program by $13 billion for students who claim to have been cheated by disreputable schools.

Citing the traditional role of states in protecting consumer rights, officials in California, Connecticut, Illinois, Massachusetts, Pennsylvania, Washington state and Washington, D.C. — have responded by imposing new licensing regulations on the debt-servicing companies and passing a student bill of rights.

State attorneys general have also brought new cases against some companies, including the industry giant Navient, for steering cash-short students away from federal loan forgiveness programs.

“When Secretary DeVos took office, we went on red alert,” said Karl A. Racine, the District of Columbia’s attorney general, whose residents have the highest debt burden, $40,000 per student borrower, in the country. “We have a responsibility, in the state attorney general’s offices, to protect our consumers. We are trying to fill the gap because the secretary is stepping away from protecting students.”

Frotman helped lead the investigation that resulted in a lawsuit in January 2017 charging that Navient, the nation’s biggest servicing company, “illegally cheated many struggling borrowers.”

In July, the chief of Navient, Jack Remondi, called on the bureau “to move on” and drop the lawsuit. Mulvaney has not said if he plans to do that, but Frotman accused him of political interference in the case, a charge that Mulvaney denies.

DeVos, who hired the dean of the embattled for-profit DeVry University to lead the unit that oversees fraud investigations, believes the bureau under Frotman’s mentor, the former director Richard Cordray, acted too often without consulting Education Department officials, Hill said.

The failure to hold companies accountable, Frotman and his allies say, has far-reaching consequences. The debt owed by 44 million students now exceeds $1.5 trillion — larger than national auto or credit card debt. One million borrowers already default every year, and 40 percent of students are expected to default on their loans by 2023, according to a January study by Brookings.

Education Department officials said DeVos was trying to recalibrate the department’s student loan division after eight years of regulatory overreach by the Obama administration. In July, DeVos announced plans to replace Obama administration policies by making more data available to students about for-profit institutions and servicers — placing responsibility for identifying low-performing schools on the students themselves. As part of that effort, the department is developing a mobile phone app to help students keep track of their finances and expenses, Hill said.

“Postsecondary students are adults who can be reasonably expected to make informed decisions and who must take personal accountability for the decisions they make,” department officials wrote in a summary of the proposal in July.

But in court filings, the Justice Department argued to shield companies from having to release detailed information about their performance to state and local officials.

The District of Columbia’s law, they wrote, requires companies to make disclosures that were meant to be “confidential unless the federal government” authorizes them.

The brief was similar to one the government filed in March supporting another industry lawsuit trying to block Massachusetts from taking its own steps. In 2017, the state sued the Pennsylvania Higher Education Assistance Agency, a quasi-governmental group that services a quarter of the country’s student loan debt, for deceptive marketing and steering borrowers away from loan forgiveness programs.

“States have always had the ability to protect the health and welfare of their residents, and we are attempting to do that,” said the attorney general of Illinois, Lisa Madigan, whose office has brought its own case against Navient over collection practices and the terms of some of their loans.

“This is the same exact battle we fought during the mortgage crisis, when federal regulators weren’t holding lenders accountable and we had to step in,” said Madigan, a Democrat. “Betsy DeVos and the Department of Education are abandoning any sort of commitment to the hardworking Americans who are trapped in student loan debt.”

Hill denied those charges, saying that enforcement actions at the department rose last year in comparison to the final year of the Obama administration. “We do our jobs, period. It’s not about getting credit in the press,” she added.

Frotman — like many other career officials inside the bureau and Education Department — spent months pushing back against Trump’s appointees but eventually tired of the battle, friends said.

Mulvaney, who once called the bureau a “sad, sick joke,” had long marginalized his team, downgrading Frotman’s unit, tucking it inside the financial education information division. He never met with Frotman, and his deputies avoided even routine interactions with the student consumer protection team, according to two former officials.

But Frotman’s effort to defeat DeVos in the states might prevail in the end.

Racine said he was optimistic about his chances of winning his case. And judges in Illinois, Florida and Washington, presiding in lawsuits against Navient and other servicers, have rejected federal supremacy arguments similar to those now being made by the Trump administration.