Last Friday, the Department of Education issued an “interpretation,” to be published today in the Federal Register, that claims that states are preempted from regulating student loan servicers. But states still play an important role in protecting student borrowers, regardless of this notice. Here’s why.
1. States have historically policed consumer protection, and student borrowers are counting on state protection now more than ever.
Problems in the student loan servicing world are well-documented. Under the Department of Education (“the department”)’s watch, companies like Navient have stripped millions of dollars in wealth from American families by misleading borrowers, charging excessive fees, and steering them to unnecessarily costly repayment options. This track record is unacceptable, and states—which have historically supervised loan servicers and debt collectors—have played an important role in reining in these abuses and ensuring that even powerful servicers like Navient are held accountable to state consumer protection law.
A number of states, including Washington, Maine, Maryland, Illinois, California, and Connecticut, have all proposed or passed Student Loan Bills of Rights that add to existing, broader state consumer protection laws, laws which have served as the basis for oversight at the state level. Additionally, states including Illinois, Washington, Pennsylvania, and Massachusetts have brought lawsuits challenging deceptive practices by student loan servicers. These state actions provide basic rights for student loan borrowers at a time when the federal government is retracting from its obligations. More states should join in protecting student borrowers.
2. Courts have repeatedly rejected the case for broad preemption of state student loan regulation.
Every single federal circuit court that has weighed in on the question as to whether states are preempted from regulating student loans has rejected the argument that the Higher Education Act broadly preempts state action. Congress carefully drafted the federal Higher Education Act of 1965, as amended (HEA)—the law which Secretary DeVos references in today’s interpretation—to only preempt state law under a narrow set of circumstances. Last fall, half the nation’s attorneys general stated that the overwhelming legal evidence indicates that Congress did not intend to broadly preempt state law. Moreover, the Supreme Court has repeatedly recognized the importance of the states’ historic consumer protection power against corporate claims of federal preemption, and still requires a very high bar for preemption claims in cases relating to federal contracts.
Furthermore, there is bipartisan support for the view that the HEA does not preempt states’ power to police student loan servicers. As Republican Colorado Attorney General Cynthia Coffman told Politico, the department “simply does not have the authority to unilaterally preempt the right of states to protect their citizens from student loan servicers and debt collectors who violate state consumer protection law.”
Despite the weight of bipartisan legal authorities to the contrary, the department persists in using dubious legal reasoning to make reckless, sweeping claims that the HEA limits states’ powers to protect their citizens from unfair and deceptive actions by servicers. These legally questionable arguments are not new, and are driven by the policy preferences of interested parties: the department’s current interpretation closely mirrors arguments that student loan servicers have been unsuccessful in making to courts, and that lobbyists for servicers have long espoused.
3. The Department of Education’s notice does not have binding legal effect.
Laws and regulations carry the force of law, but the department’s new “ interpretation” does not meet either of those standards. The department’s “interpretation” merely states an opinion on how courts should come down on the issue; it is not binding and does not have preemptive effect. Instead, it is ultimately up to the courts to rule on the extent of states’ powers to regulate student loan servicers in any specific circumstance.
4. The Department of Education had already expressly recognized a role for state laws, and Betsy Devos should also welcome that help.
Prior to issuing this current “interpretation” on federal preemption of state laws, the department has repeatedly recognized the role that states play in regulating student loan servicing and collections. In fact, in the department’s servicer contracts, it define the roles and responsibilities of student loan servicers by incorporating state servicing standards, stating that:
“The contractor(s) will be responsible for maintaining a full understanding of all federal and state laws and regulations and FSA requirements and ensuring that all aspects of the service continue to remain in compliance as changes occur.” [Emphasis added.]
As a part of these contracts, the Department of Education pays student loan servicers hundreds of millions of dollars to administer and collect on its $1.4 trillion dollar portfolio. But it has long failed to adequately monitor the performance of student loan servicers. In fact, in response to a federal lawsuit that its actions were harming student loan borrowers, Navient, the largest student loan servicer in the country, claimed that it was not expected to “act in the interest of the consumers.”
Despite the publication’s claim of “exemplary customer service,” borrowers have submitted tens of thousands complaints to the Consumer Finance Protection Bureau about student loan servicers and debt collectors. Secretary DeVos should embrace all the help she can get.