Education Department Tells States to Get off Student Loan Servicers’ Backs

The U.S. Department of Education, led by Secretary of Education Betsy DeVos, on March 12 formally announced its intention to prevent state governments from regulating student loan servicers. In the statement, published in the Federal Register, the Education Department says states do not have the authority to regulate loan servicers. Specifically, they cannot enforce regulations … Continue reading Education Department Tells States to Get off Student Loan Servicers’ BacksThe post Education Department Tells States to Get off Student Loan Servicers’ Backs appeared first on MagnifyMoney.

Posted 10:01 p.m. Mar 14, 2018 — Updated 10:01 p.m. Mar 14, 2018

The U.S. Department of Education, led by Secretary of Education Betsy DeVos, on March 12 formally announced its intention to prevent state governments from regulating student loan servicers.

In the statement, published in the Federal Register, the Education Department says states do not have the authority to regulate loan servicers. Specifically, they cannot enforce regulations on the federal agency’s loan servicers that undermine “uniform administration of the program.” Some states make servicers comply with state licensing laws in order to collect debts from the state’s citizens and impose deadlines on servicers for responding to borrower inquiries.

The same day, the National Governors Association (NGA) issued a statement against the rule, saying, “States have stepped up to fill the void left, we believe, by the absence of federal protections for student loan borrowers, from potential abusive practices by companies servicing student loans.”

Meanwhile, the Student Loan Servicing Alliance (SLSA) released a statement in support of the Education Department’s announcement. Trade organizations like SLSA have lobbied the federal government for protection against state’s efforts to impose rules and regulations on the industry.

For example, in July 2017 the National Council of Higher Education Resources (NCHER), a trade group representing student loan servicers and debt collectors, sent a letter to the Education Department claiming state rules make it more difficult and expensive for loan servicers to collect on loans across the country.

The Education Department currently has nine companies on its roster of loan servicers: Navient, Nelnet, Pennsylvania Higher Education Assistance Agency (PHEAA), MOHELA, HESC/EdFinancial, CornerStone, Granite State, OSLA Servicing and Debt Management and Collections System. The U.S. government hires loan servicers to manage nearly $1.4 trillion in federal student loan debt for roughly 43 million consumers.

Why issue the statement?

The move comes after the Massachusetts Attorney General Maura Healey in August filed a lawsuit against PHEAA, which does business as FedLoan Servicing. The complaint alleges PHEAA violated state and federal laws as its servicing failures prevented students from qualifying for discharge under the federal Public Service Loan Forgiveness and Teacher Education Assistance for College and Higher Education (TEACH) Grant programs.

The complaint also alleges PHEAA overcharged student borrowers and prevented them from staying on track with income-driven repayment plans that may make borrowers’ monthly payments more affordable.

The Massachusetts lawsuit caused a bit of a stir. In January, the U.S. Justice Department filed papers saying the Massachusetts attorney general could not pursue the claims. However, a Massachusetts state court on March 1 ruled Healey could move forward with the lawsuit against FedLoan Servicing.

But in Monday’s statement, the Education Department said federal law preempts Massachusetts’ claims.

States are fighting a battle on two fronts

In October 2017, 25 state attorneys general sent a letter to DeVos asking the Education Department to reject the loan servicers’ efforts to “dismantle state oversight of the student loan industry.”

In the letter, the attorneys general claim the servicers’ request for the federal government to preempt state oversight would “defy the well-established role of states in protecting their residents from fraudulent and abusive practices, plainly exceed the scope of the Department’s lawful administrative authority, and would needlessly harm the students and borrowers at the core of the Department’s mission.”

Other lawsuits have been filed against the loan servicers, the Education Department and DeVos.

Healy in December 2017 sued DeVos for “failing to provide federal loan discharges for students victimized by Corinthian Colleges.” The attorneys general of Illinois and New York joined the complaint. The complaint was filed in parallel with a separate lawsuit by the California attorney general with similar allegations.
The Pennsylvania attorney general in October 2017 filed a lawsuit against student loan servicer Navient “over widespread abuses in their student loan origination and servicing businesses.”
In January 2017, under the leadership of former director Richard Cordray, the Consumer Finance Protection Bureau and the states of Washington and Illinois sued Navient, for allegedly cheating borrowers out of their right to lower repayments. It’s unclear at this time whether new CFPB leadership will continue to pursue the lawsuit. However, Propublica reports that CFPB Director Mick Mulvaney’s team “recently asked enforcement lawyers to prepare for a potential settlement of its lawsuit alleging that Navient, the gigantic student-loan servicer, abused borrowers, according to a high-level CFPB official.”
In September 2017, NPR reports, the Education Department cut ties with the CFPB, leaving borrowers without the federal financial regulator’s oversight over loan servicers.

Those are only a few of many lawsuits and settlements between states, federal agencies and loan servicers in recent years.

What happens now for borrowers

It’s unclear how borrowers in states with consumer protections for student loan borrowers will be affected by the Education Department’s interpretation of the law, but if it legally preempts state regulations, borrowers may be negatively affected.

“If states are prevented or discouraged from overseeing education loan servicers, borrowers may be left with virtually no protections against harmful practices that can push them deeper in debt,” says Suzanne Martindale, senior attorney for Consumers Union, the advocacy arm for Consumer Reports, in a statement issued soon after the Education Department’s notice.

But policy and legal expert say borrowers may not have much to worry about, as the current administration’s interpretation may not be enforceable.

“The Trump Administration’s action is legally dubious and should be ignored by state regulators working to protect millions of Americans who deserve honest and fair treatment from debt collectors,” says Christopher Peterson, senior fellow at the Consumer Federation of America, in a statement responding to the announcement.

In the statement, Peterson cites past instruction from the Department of Education regarding state regulation of servicers to support his claim.

“The long-standing view of both federal and state governments has been that the Higher Education Act does not override state laws that provide additional protection to student loan borrowers, as long as those laws do not actually conflict with federal law,” says Peterson.

It may ultimately be up to the courts to decide how borrowers will be affected.

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