A court case playing out in Massachusetts could have implications for the U.S. Department of Education’s efforts to shield student loan contractors from state oversight.
A superior court judge on Thursday refused to dismiss a lawsuit filed in August by Massachusetts Attorney General Maura Healey against Pennsylvania Higher Education Assistance Agency, a company that manages student loans and grants on behalf of the government.
Healey has accused the company, which operates under the name FedLoan Servicing, of haphazardly handling two federal programs that encourage college graduates to enter fields serving the public good with the promise of loan forgiveness or financial aid.
The case has garnered the attention of the U.S. Department of Justice, which filed papers in January on the Education Department’s behalf arguing that federal law preempts Massachusetts’s claims against FedLoan.
That argument is at the heart of a memo recently drafted by the Education Department stating that only the federal government has the authority to oversee federal student loan servicing companies, not states. The memo, which was first reported by Bloomberg, is still being finalized but is a clear attempt by the department to stop a nascent movement of states seeking greater oversight of servicers.
Though Thursday’s ruling does not directly address preemption, some legal experts consider it a sign that the Education Department may have a difficult time defending its position in court challenges that could arise once the final guidance is released.
“Even before the notice is released, the courts are already pushing back against the notion that state law doesn’t apply to student loan debt collectors,” said Christopher Peterson, a law professor at the University of Utah and former enforcement attorney at the Consumer Financial Protection Bureau. “In the past, the Department of Education always told its contractors to follow state law because it’s the law.”
The Education Department did not immediately respond to requests for comment.
FedLoan declined to discuss Thursday’s ruling. But company spokesman Keith New said it “does not agree with the allegations made by the Massachusetts attorney general’s office” and “remains committed to resolving outstanding borrower issues while following the U.S. Department of Education’s policies, procedures and regulations as mandated by the agency’s federal servicing contracts.”
Massachusetts has accused FedLoan of mismanaging payments under Public Service Loan Forgiveness, a program that wipes away federal student debt for people in the public sector after they have made 10 years’ worth of payments.
The state says the company also mishandled the Teacher Education Assistance for College and Higher Education Grant, a federal program that provides money to students willing to work in high-needs schools or teach high-needs subjects for four years. FedLoan is accused of converting grants to loans in error.
For years, consumer groups, lawmakers and attorneys general have criticized the Education Department for lax monitoring of the companies it pays to manage the $1.4 trillion student loan portfolio. States have been stepping in to fill what many see as a void in federal oversight of student loan servicers. California, Connecticut and the District have used licensing to bring federal student loan servicers 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 state attorney general.
The student loan industry has lobbied against the state movement. In July, the National Council of Higher Education Resources, a trade group representing private lenders, loan servicers, debt collectors and loan guarantee agencies, sent a letter urging the Education Department to preempt state laws that regulate federal contractors.
Shortly after, a group of 25 state attorneys general from red and blue states wrote Education Secretary Betsy DeVos imploring her not to cave into industry demands and explaining that the Education Department “cannot sweep away state laws that apply to student loan servicers and debt collectors.”