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Student loan servicer asks court to settle spat between Education Dept. and Connecticut over licensing dispute

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The Pennsylvania Higher Education Assistance Agency, a company that manages student loans and grants on behalf of the federal government, is asking the courts to weigh in on a dispute between Connecticut and the U.S. Education Department.

Connecticut is among several states that demand student loan servicers obtain a license to collect payments from borrowers living within their borders. As a part of that license, the state insists servicers such as the Pennsylvania Higher Education Assistance Agency — widely known by the acronym PHEAA — disclose information about their business activities.

The company says it provided the Connecticut Department of Banking all requested documents except for one related to the federal Direct Loan Program. The company maintains that document is protected by federal privacy law and the terms of the company’s contract with the Education Department, which rejected PHEAA’s petition to release the information to Connecticut.

Connecticut has threatened to suspend the company’s license to service the federal loans of 80,000 residents if it does not hand over the documents. With the Education Department holding firm to its position, PHEAA on Wednesday asked the U.S. District Court for the District of Columbia to resolve the conflict.

“As a federal loan servicer, PHEAA seeks direction when conflicting regulatory guidance is issued by different federal and state regulators,” the company said, in a statement Wednesday. “The court will review the facts and . . . PHEAA, as a state government entity, will fully comply with the court’s determination.”

As it stands, Connecticut has not taken action to suspend the company’s license. If the state does pursue the suspension, PHEAA can appeal and ultimately request a hearing. The dispute has no immediate impact on the company’s Connecticut customers.

The Education Department declined to comment on pending litigation. In a recent letter regarding the dispute, the agency recommended PHEAA have the Connecticut Department of Banking submit a direct request for the records. Education Secretary Betsy DeVos’s agency said it would then evaluate whether to turn over the documents based on privacy and freedom of information laws.

“Secretary DeVos is choosing to obstruct state law enforcement officials by refusing to allow PHEAA to turn over important information to state law enforcement,” said Christopher Peterson, a law professor at the University of Utah and former enforcement attorney at the Consumer Financial Protection Bureau. “The Trump administration is siding with the student loan debt collection industry over teachers, cops and veterans that just want fair treatment in student loan repayment programs.”

California, Connecticut, the District of Columbia and Illinois 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. They also require companies to produce periodic information on their business activities that could be used to identify breakdowns in servicing.

More than 15 states have servicing regulations in place or under consideration. And that has the industry up in arms.

Matthew Smith, a spokesman for the Connecticut banking agency, said the office is reviewing the complaint alongside the state attorney general. He said if PHEAA is precluded from providing information about its federal portfolio, a disparate system could be created, with borrowers who have private loans receiving more consumer protection than those with federal debt.

“The Department of Banking takes its responsibility for ensuring strong consumer protections for borrowers extremely seriously,” he said, in an email Thursday to The Washington Post. “As Secretary DeVos and the Trump administration try to undermine our ability to do so, we remain steadfastly committed to upholding this practice.”

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

The Trump administration has developed a contentious relationship with states over the regulation of student loan servicing companies. In March, the Education Department issued guidance telling state regulators to back off the companies that manage the federal agency’s $1.3 trillion portfolio of student loans, arguing that only the federal government has the authority to oversee its contractors.

State authorities, including California Attorney General Xavier Becerra (D), dismissed the guidance as having no legal basis under federal law and said they were prepared to defend their position in court. They have argued that if the federal government was holding the contractors accountable, states would not need to intervene. Thousands of borrowers have complained to the Consumer Financial Protection Bureau about servicers providing inconsistent information, charging unexpected fees or misplacing paperwork.

Student loan servicing group sues D.C. over licensing and disclosure law

Industry groups lobbied DeVos and Congress to prevent states from imposing additional rules and regulations. Last month, the Student Loan Servicing Alliance, a trade group representing companies who collect education debt, sued the District claiming its licensing law supplants federal authority and creates unnecessary layers of complexity.