Trump administration fights states' crackdown on student loan collectors
The Trump administration is taking steps to shield student loan collection companies from state regulators, over the objections of consumer advocates and even some Republican attorneys general.
Education Secretary Betsy DeVos is preparing to issue a declaration that companies collecting federal student loans are off limits for state lawmakers and regulators. The “notice of interpretation” argues that only the federal government, not the states, has the authority to oversee federal student loan servicers, according to a draft of the document obtained by POLITICO. That includes industry giants like Navient and Nelnet.
The attempt by the Education and Justice departments to help the student loan industry pushes back against growing scrutiny from states — and even as the Trump administration has repeatedly called for giving states more control over education and other issues.
It also comes after the student loan industry has for months lobbied the federal government for protection from the state efforts to crack down on them. Industry groups say that a patchwork of state rules governing student loan servicing will make it more difficult and costly for companies to operate across the country.
The department each year pays nearly $1 billion to a handful of student loan companies that collect the debt on behalf of the federal government. More than 42 million Americans owe roughly $1.4 trillion in outstanding federal student loans.
More than a dozen states have either passed or are considering state laws that would tighten regulations on these student loan companies. The new rules are needed to improve the quality of student loan servicing and curb predatory practices by some of those businesses, proponents say.
DeVos’ notice echoes a court filing that the Justice Department made earlier this year when it sided with a federal student loan servicer accused by Massachusetts of violating state consumer protection law. Trump administration attorneys argued in a “statement of interest” that the state couldn’t pursue legal claims against the servicer because they are preempted by federal law.
And, separately, Education Department officials late last year ordered the loan companies that work for the agency to avoid responding directly to information requests from third parties, which would include state regulators, according to a memo obtained by POLITICO through a Freedom of Information Act request.
But consumer advocates and nearly half of the nation’s attorneys general disagree, arguing that states have the right to oversee companies operating within their borders that collect loan payments from their residents.
The industry’s lobbying efforts last year drew criticism from a group of 25 state attorneys general, led by New York’s Eric Schneiderman. In a letter, the attorneys general urged DeVos “to reject an ongoing campaign by student loan servicers and debt collectors to secure immunity for themselves from state-level oversight and enforcement.”
The Education Department “cannot sweep away state laws that apply to student loan servicers and debt collectors,” said the letter, which was also signed by a handful of GOP attorneys general, including Ken Paxton of Texas, Herbert Slatery of Tennessee and Cynthia Coffman of Colorado.
Bills targeting the student loan industry have mostly cropped up in blue states over the past several years. They’re often framed as a “Borrowers Bill of Rights” and typically impose new requirements on the loan servicers and establish a system to license them.
Proponents of the state efforts are trying to make up for a lack of industry-wide enforcement at the federal level, according to Charley Olena, the advocacy director for New Era Colorado, which is pushing legislation in that state.
“We’re seeing a strong backlash to Betsy DeVos and her rollbacks of borrower protections at the federal level,” she said. “That’s a big motivator.”
California, Connecticut, Illinois and the District of Columbia have already enacted new laws over the past several years that require student loan servicers to be licensed and regulated.
New York Gov. Andrew Cuomo’s 2019 budget proposes to begin licensing student loan servicers in the state, a plan backed by Schneiderman, the attorney general. The New Jersey Legislature last year passed a measure, which was pocket-vetoed by then-Gov. Chris Christie as he left office. But it’s again moving through the statehouse, now under Democratic Gov. Phil Murphy.
In Virginia, Democratic Gov. Ralph Northam campaigned on the issue and included a bill to regulate student loan servicers as part of his legislative agenda earlier this year. State lawmakers in Maine, Georgia, Maryland, Massachusetts, Minnesota, Missouri, New Mexico, Oregon, Pennsylvania, Rhode Island, Washington and Wisconsin have also considered similar legislation.
But those efforts could run into new resistance from the federal government under DeVos’ forthcoming guidance. The notice is expected to target state laws or rules that attempt to regulate companies working on behalf of the federal government to collect loans, though that represents the lion’s share of the student loan market.
The collections of those federal loans “implicate uniquely federal interests,” says a draft of the notice, which adds that state regulation of the federal student loan servicers conflicts with Congress’ objective of streamlining federal student lending and saving taxpayer dollars.
The department argues that the regulatory burden imposed by states on the companies will eventually get passed along to the federal government. The Education Department currently hires nine companies — including Navient, Nelnet, Great Lakes and the Pennsylvania Higher Education Assistance Authority — to collect federal student loans.
Education Department officials did not respond to a request for comment on the notice.
Democratic state attorneys general in recent years have increasingly targeted student loan servicers with lawsuits, which accuse companies of engaging in illegal and deceptive tactics that mirror problems in the mortgage servicing industry that preceded the financial crisis a decade ago.
The CFPB has also taken aim at the industry, and officials there have publicly suggested that the Education Department hasn’t done enough to police its own contracted loan collectors. The bureau’s top student loan official, Seth Frotman, has also testified in states in favor of new state regulations on the industry.
The CFPB — along with the attorneys general of Illinois, Washington, and Pennsylvania — last year all brought separate lawsuits against Navient over a range of its business practices. The company was accused of deceiving borrowers, misallocating payments and steering borrowers into costlier forbearances rather than income-based repayment programs. Navient has denied the allegations and is fighting the lawsuits in court.
Massachusetts Attorney General Maura Healey last year sued the Pennsylvania Higher Education Assistance Authority, which operates FedLoan Servicing, accusing the loan servicer of violating state consumer protection laws. The lawsuit says that PHEAA failed to properly process the monthly payments of borrowers participating in the federal Public Service Loan Forgiveness program, allegations that the loan servicer denies.
The Trump administration has already backed PHEAA in court as it fights the Massachusetts lawsuit. The Justice Department argues that Massachusetts is barred from bringing most of its lawsuit because of federal preemption.
“This result is necessary to preserve the important federal interests in cost-effectively and uniformly administering and streamlining the federal student loan programs,” Justice Department attorneys wrote. PHEAA’s collection of federal student loans is “already heavily regulated” by the Education Department, they said.
John L. Culhane, Jr., a partner at Ballard Spahr LLP, who represents student loan servicers, said that the state-by-state effort to regulate the companies is “totally misguided” and “clearly” preempted by federal law.
“You’ve got states trying to control rules for what’s essentially federal property and insert themselves into the contractual relationship” between the Education Department and the companies it hires to collect federal student loans, he said. “If state AGs want to be involved here, they should be communicating their concerns with the department directly.”
Jack Remondi, the president and CEO of Navient, said on an earnings call last month that federal law “makes it very clear that these are federally regulated loans and not subject to additional state rules or regulations.” He added that “the changing regulatory winds here make that something that will be more prominent.”
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