New ED Interpretation Gives States Ability to Regulate Federal Student Loan Servicers

By Owen Daugherty, NASFAA Staff Reporter

Individual states will be able to provide more oversight and regulate student loan servicers without being preempted by the federal Higher Education Act (HEA), according to a notice of interpretation put forth this week by the Department of Education (ED).

ED in the notice said it will rescind a legal opinion issued by former Education Secretary Betsy DeVos that states did not have the authority to oversee federal student loan servicers. 

ED said the new interpretation will allow states and the federal government to better work together in helping to protect student borrowers and is the latest move by the Biden administration to undo student loan policy measures enacted under the previous administration.

The move will “help states enforce borrower bills of rights or other similar laws to address issues with servicing of federal student loans” and is part of Federal Student Aid’s (FSA) renewed efforts to improve oversight of student loan servicers. 

FSA chief operating officer Richard Cordray earlier this year rescinded a related Trump-era policy that made it more difficult for state and federal regulators to access pertinent records of borrowers. The change allows state and federal regulators to access student loan borrowers data and information held by servicers in an effort to provide better oversight to the servicers and debt collectors.

"Helping more students afford college is a top priority, and effective collaboration among the states and federal government is the best way to ensure that student loan borrowers get the best possible service," Education Secretary Miguel Cardona said in a statement Monday accompanying the notice.

Rep. Bobby Scott (D-Va.), chairman of the House Education and Labor Committee, applauded the new interpretation, saying it will restore states’ ability to protect borrowers and ensure state agencies have the ability to provide oversight and consumer protections. 

“The Biden-Harris Administration has taken a critical step to improve oversight of student loan servicers and ensure that all borrowers are protected from unfair and deceptive practices,” he said in a statement. “The Trump-era policy of shielding student loan servicers from state-level oversight and accountability was a disservice to student borrowers and taxpayers who are often forced to foot the bill when borrowers are unable to pay their loans.”

Not all, however, see the move as a positive one that will benefit borrowers and work to ensure a smooth repayment experience. Rep. Virginia Foxx (R-N.C.), ranking member on the House Education and Labor Committee, argued the move could be detrimental for borrowers.

"Federal student loan servicers work for the federal government and their assigned borrowers," Foxx said in a statement. "Forcing them to serve dozens of state governments that contradict federal rules will create borrower confusion and worsen the borrowers' repayment experience."

NASFAA President Justin Draeger said he was concerned that the policy change could create confusion for schools and borrowers as to who is driving key federal student loan operational decisions.

“This is a question of who is in charge of federal student loan servicing. Student loan servicers don’t operate independently of their federal contracts, they are wholly responsible to the U.S. Department of Education. If ED believes there are areas where states could help improve federal student loan servicing, why doesn’t ED simply require those changes without ceding responsibility to state attorneys general?” Draeger said.

“Allowing states to preempt federal standards sounds operationally challenging and could prove to be problematic in unintended ways. Let’s improve federal student loan servicing, and correct missteps, but let’s do it in a unified way out of a unified playbook,” he added. 

The interpretation will take effect this week once it is published in the Federal Register and ED said it will accept public comments on the new legal interpretation for 30 days from publication.


Publication Date: 8/11/2021

Lori V | 8/11/2021 4:57:40 PM

Collaboration & communication is key! But please, let's not confuse borrowers more by having one state add additional burden and not have it in place for the state next door. When it comes from the top, we all have a common "understanding" of the rules. Let's not let states muddy the waters not only for borrowers but the servicers who service these loans. If the servicers are vetted as they should be, put better servicing mandates/rules/regs in place upfront. Let the states deal with the scams out there that hurt our students as Dave S. suggests.

David S | 8/11/2021 9:18:38 AM

While yes, uniformity has its benefits, there's also the issue of states' rights, which is as old as the United States itself. We need some balance between what's sometimes the bare minimum enacted by federal legislation or regulation and the more stringent protections some states demand for its residents. Ideally, this move forces states and the feds to work together to protect student borrowers and perhaps create that one student-centered unified playbook Justin is calling for. Without it, as we saw in recent years, an administration - say, one that is led by a chief executive so disinterested in student consumer rights that he was forced to pay out $25M in penalties for running a fraudulent "university" - can enact policies that side with proven scam artists, with no regard for students.

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