Education Department Tells States to Back Off Student Loan Firms

WASHINGTON (CN) – Student loan debt collectors may soon be shielded from state regulators, according to a notice filed Friday by the U.S. Department of Education arguing states don’t have the power to crack down on the companies.

The declaration was entered into the Federal Register but has not been formally published, meaning it is not yet an official rule.

“Recently, several states have enacted regulatory regimes that impose new regulatory requirements on servicers of loans under the William D. Ford Federal Direct Loan Program,” the unpublished declaration states. “States also impose disclosure requirements on loan servicers with respect to loans made under … the Higher Education Act of 1965.”

Such state regulation, which is also imposed on the Federal Family Education Loan Program, is “preempted by federal law,” the Department of Education, or DOE, argues.

“The department issues this notice to clarify its view that state regulation of the servicing of Direct Loans impedes uniquely federal interests, and that state regulation of the servicing of the FFEL Program is preempted to the extent that it undermines uniform administration of the program,” the declaration states.

The move is not completely unexpected: the department just last week filed a statement of interest in a lawsuit brought by Massachusetts against a DOE loan servicer.

Massachusetts Attorney General Maura Healey sued the Pennsylvania Higher Education Assistance Agency, also known as FedLoan Servicing, last August.

She claims FedLoan’s practices are unfair and deceptive, and that it often makes false promises of loan forgiveness to students who agreed to enter public service. Healey also alleges students have been overcharged for debt-related services.

In January, the Department of Justice, which represented the DOE, filed a lawsuit in Suffolk County Superior Court arguing Healey’s claims were invalid under current state law.

However, a superior court judge refused last week to toss Healey’s complaint.

Healey’s office did not immediately respond Friday to a request for comment on the DOE’s latest declaration.

According to the declaration, the DOE believes “where state servicing laws go beyond the requirements of federal law in restricting the actions a servicer may take to collect on a loan, such laws impede the ability of the Department to protect federal taxpayers by ensuring the repayment of federal loans.”

A servicer doesn’t have a choice to cease operations in a particular state to avoid licensing fees or other state-imposed penalties, the department contends.

Rather, states are using a debt servicer’s compliance with federal law and other contracts to “extract payments that benefit the state at the expense of the federal taxpayer,” according to the filing.

“A requirement that federal student loan servicers comply with 50 different state level regulatory regimes would significantly undermine the purpose of the Direct Loan Program to establish a uniform, streamlined and simplified lending program managed at a federal level,” the document says.

The DOE also did not immediately respond to a request for comment Friday.

James Bergeron, president of National Council of Higher Education Resources, a trade association for education lenders, guarantors and collection agencies, welcomed the move by the DOE.

“NCHER [has] long believed that the federal student loan programs – both the Federal Direct Loan Program and the Federal Family Education Loan Program – are national in scope and need to be administered uniformly throughout the 50 states,” he said. “The federal student loan servicers have no choice where to operate.”

Bergeron added, “Today’s notice…should alleviate many of the most problematic provisions of the existing and pending state laws that create significant differences between the servicing of borrowers residing in certain states, adding unnecessary complexity and cost to the federal student loan system and creating a regulatory maze in the process and confusion for borrowers and their servicers.”

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