Since 2017, a few federal student loan lenders have been under fire for questionable practices that involve how they deal with borrowers, resulting in state lawsuits against FedLoan and Navient that claim the servicers are mismanaging student loan forgiveness options for thousands of Americans.
In a bold move by Betsy DeVos and the Department of Education, however, states and their attorneys may be asked to stand down. And it could receive the blessing of the White House, who has the power to take states to court and essentially prohibit their governments from regulating student debt collectors entirely.
In an internal memo issued last month, the U.S. Department of Education made its stance clear on why federal student loan servicers should be protected. Part of the memo reads:
“Congress created and expanded the Direct Loan Program with the goal of simplifying the delivery of student loans to borrowers, eliminating borrower confusion, avoiding unnecessary costs to taxpayers, and creating a more streamlined student loan program. Recently, several States have enacted regulatory regimes or applied existing State consumer protection statutes that undermine these goals.”
While the memo has yet to be officially released, it essentially reverses the Department of Education’s position on the subject from 2016. Not to mention, it could further signal that the White House is interested in backing publicly traded companies over states who have already seen the impact of these sometimes-dubious federal student loan lenders.
According to states attorneys across the U.S., the federal government has shown little oversight of student loan servicers until recently. As a result, it has forced states to file lawsuits and take on the court battle themselves, which has apparently displeased the Department of Education enough to bring us to the current situation.
Speaking with consumer advocates, however, a different picture has emerged regarding the memo. “It’s not surprising that this administration is weighing in on the side of industry over students and taxpayers,” Whitney Barkley-Denney, a legislative policy counsel at the Center for Responsible Lending said in a statement. “This is just a different verse of the same song we’ve been hearing over the past year” from Secretary DeVos and the Education Department.
And others agree, pointing to the memo itself as a sign that the Education Department and Trump administration don’t fully understand the reasons behind the lawsuits – or their ultimate legality.
When asked if the memo had any validity, Christopher Peterson, a law professor at the University of Utah and former enforcement attorney at the Consumer Financial Protection Bureau said, “Nowhere in this document does the Department of Education quote a statute from Congress that says the department is authorized to block states from stopping deceptive debt collection practices. That’s because such a law does not exist.”
Today, the states of Illinois, California and Connecticut have laws in place governing how student loan lenders interact with borrowers. And considering the lawsuits by attorneys general in Massachusetts, Illinois, Washington and Pennsylvania, who have all filed lawsuits against these contractors – contractors that receive nearly $1 billion in funding to handle debt payments – more are expected to follow.
What could this mean for states who are able to get ahead of the memo before it becomes more of a federal issue? So far in some states, it’s meant fees and penalties for not operating honestly, along with transparency directives and compliance requirements that keep these lenders in check.
However, these laws haven’t been passed without a fight, as the student loan industry has recently pushed back with lobbying in states like Maine, New York and Illinois to drive lawmakers into abandoning or amending bills during the debate process.
Speaking to The Intercept, James Bergeron, the President of the National Council of Higher Education Loan Resources said, “NCHER and its membership have 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.” Otherwise, Bergeron continued, lenders may be subject to a “regulatory maze” that only complicates things further.
As of today, states are not considering the memo to hold any legal weight. In fact, many attorneys general are taking it as a mere statement on the Education Department’s thinking rather than an assertion of their legal intentions. However, loan servicers could potentially use the memo as a defense in current and future lawsuits until a final decision is reached by the Trump administration, who is already working on bankruptcy options for borrowers and potentially making big changes to loan forgiveness down the road.
Have your student loans been affected by lawsuits against your loan servicers? Get more information on how to stay ahead of changes and make your student loans more affordable by filling out our free online form or speaking to a specialist at (800) 771-6358.