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Biden administration rolls back DeVos rule limiting state authority over student loan companies

Education Secretary Miguel Cardona speaks at the White House on Aug. 5. (Susan Walsh/AP)

The Education Department on Monday scrapped a Trump-era policy of shielding companies that manage its $1.5 trillion student loan portfolio from state regulation.

Instead, the department is encouraging states to work with the federal agency to protect borrowers and hold loan servicers accountable. The agency issued guidance clarifying that while federal law does preempt state regulation in some instances, states can go after servicers for deceptive practices, payment errors and other consumer protection matters.

Education Dept. opens door for student loan companies to ignore state authority

“Effective collaboration among the states and federal government is the best way to ensure that student loan borrowers get the best possible service,” Education Secretary Miguel Cardona said Monday. “We welcome public input on this interpretation and look forward to enhancing consumer protections for student loan borrowers by clarifying the relationship between federal and state law on this issue.”

Cardona’s position is a departure from his predecessor Betsy DeVos, who backed student loan servicers in their effort to avoid what they’ve called a regulatory maze of state and federal laws.

Since 2014, states have stepped in to fill what many see as a void in federal oversight of student loan servicers. Maryland and Virginia are among a dozen states that have established a borrower’s bill of rights with minimum standards for timely payment processing, correction of errors and communication.

The measures require companies to produce periodic information on their business activities that could be used to identify breakdowns in servicing. About another dozen states are on track to pass similar bills by the end of this year, according to the Student Borrower Protection Center.

“States have long played an integral role in higher education oversight and have been on the front lines of protecting student borrowers from fraud and abuse,” Massachusetts Attorney General Maura Healey said Monday. “We applaud Secretary Cardona for rejecting the previous interpretation that inaccurately represented the states’ authority and emboldened bad actors. Our residents deserve a strong federal-state partnership.”

Servicing groups have called state campaigns for greater oversight of their industry misguided and accused some states of imposing onerous licensing requirements.

California and Connecticut, for instance, require servicers obtain a license to operate within their borders as a way to bring the companies under their regulatory purview. Their local agencies have the authority to monitor loan servicers’ compliance with federal laws, investigate their behavior and refer cases to the attorney general.

Industry groups have said the added regulation increases the cost of doing business to the detriment of borrowers and undermines federal law, a position Republican lawmakers agree with.

Rep. Virginia Foxx (N.C.), the top Republican on the House Education Committee, said Cardona’s decision to allow to states to interfere in the federal student loan program will have “disastrous consequences” for borrowers and “will be remembered as a spectacular failure.”

“Forcing [federal student loan servicers] to serve dozens of state governments that contradict federal rules will create borrower confusion and worsen the borrowers’ repayment experience,” Foxx said Monday. “The department’s bureaucratic incompetence, combined with inherent design flaws in the Higher Education Act, are the reasons why borrowers get left behind.”

Consumer groups say that Republicans are trying to protect servicers at the expense of borrowers but agree that the Education Department has historically done a poor job of handling its loan portfolio. And that, they say, is all the more reason state oversight is necessary.

“By standing shoulder to shoulder with the state consumer protection community, President Biden has an opportunity to put an end to the lawlessness by many in the student loan industry and make clear it will not be tolerated,” said Seth Frotman, executive director of the Student Borrower Protection Center.

Watchdog blasts Education Department for sloppy oversight of loan-servicing contractors

State and federal authorities have received thousands of complaints about servicers misplacing paperwork, providing inconsistent information or charging unexpected fees. The Consumer Financial Protection Bureau has accused some companies of driving borrowers into default with sloppy collection and application of payments.

Critics say the Education Department has done little to curb poor servicing, a charge that intensified under DeVos. She drew criticism in March 2018, when the department issued guidance arguing that state regulation of federal student loans “impedes uniquely federal interests.”

Court rules student loan companies are subject to state consumer laws, contrary to Trump administration’s stance

Great Lakes Educational Loan Services used the guidance to shore up attempts to dismiss borrower lawsuits. Although the student loan servicer was initially successful, the appellate courts rejected the position asserted in two cases. Dan Zibel, who argued the borrowers’ cases, said replacing the DeVos guidance “opens the door to greater oversight of servicers who leveraged the notice in court to evade accountability.”

Zibel, chief counsel at the National Student Legal Defense Network, said he hopes the department’s decision signals it is “moving quickly towards expanding accountability across student lending and better protecting student borrowers from being defrauded — especially during our recovery from the pandemic.”