The U.S. Education Department wants states to defer to federal oversight of the companies that service the billions of dollars in student loans that it issues, but the states are not going down without a fight.
In a final notice published on Monday in the Federal Register, the department outlined its interpretation that the federal government, not the states, is responsible for overseeing loan servicing. But several state legislatures are considering — or have passed — bills to tighten the rules governing the companies, and the department’s new interpretation would pre-empt those laws.
“State regulation of the servicing of direct loans impedes uniquely federal interests,” the department wrote in the notice. “State regulation of the servicing of the FFEL [Family Federal Education Loan] Program is pre-empted to the extent that it undermines uniform administration of the program.”Several consumer advocates and state attorneys general quickly voiced their displeasure with the department’s interpretation after it became clear on Friday that the department would use a broad reading of its authority. And two Democratic attorneys general said they would disregard the guidance.
“The California Department of Justice has been fighting tirelessly to protect our students against unscrupulous loan servicers, and we won’t stop,” said Xavier Becerra, the attorney general of California, in a written statement. “We are prepared to defend the protections we secured for college students by making loan servicers accountable for their conduct every step of the way.”
Also on Monday the bipartisan National Governors Association expressed dismay at the department’s new interpretation. “With this declaration, the department moves to block state policies protecting student borrowers by establishing a federal regulatory ceiling,” the association wrote. “We are concerned the department is heading in a direction that runs counter to the principles of collaborative federalism governors presented to Congress.” The group urged the department to “reconsider” the scope of its notice.Meanwhile, student-loan servicing groups welcomed the new guidance.
“The federal Higher Education Act and court decisions based on it are clear that federal pre-emption is appropriate where federal law is directing the management of federal programs,” the Student Loan Servicing Alliance said in a written statement.
“The department’s guidance is not just good law, it is good policy,” the alliance continued. “Clear, uniform student-loan servicing guidance from the federal government will help borrowers avoid the frustrations of an inconsistent patchwork of policies from individual states.”