This story has been updated to include comments from the Education Department.
Eleven state financial regulators are calling on Education Secretary Miguel Cardona to rescind Trump-era regulations that they say are insulating student loan servicers from more oversight.
The consumer protection agencies from California, Colorado, Connecticut, Illinois, Maine, Massachusetts, New Jersey, New York, Rhode Island, Washington and Wisconsin are asking Cardona to reverse what they call “unnecessary and legally dubious” guidelines under former Education Secretary Betsy DeVos that prohibited states from taking on investigations of possible misconduct and implementing consumer protection laws.
These “misguided and unsound policies inhibit states’ abilities to oversee this servicing industry in the midst of a student loan debt crisis,” the commissioners wrote in the letter. “As such, we recommend that the U.S. Department of Education rescind these policies to promote states’ ability to protect their borrower residents.”
In response to the letter, Department of Education (ED) Press Secretary Kelly Leon said that it shares "these states’ commitment to protecting student loan borrowers," and added: "We are taking a close look at the Department’s position with respect to independent oversight of its contractors to ensure that states can be strong partners in ensuring accountability.”
The request is highly significant because the states are trying to regain oversight over how servicers interact with borrowers. This comes as the pandemic-related payment pause on federal student loans is set to expire in October and state oversight will focus on how servicers offer repayment plans, walk borrowers through their Public Service Loan Forgiveness applications, or advise debtors who are unable to make payments in the months after.
Rescinding DeVos-era policies
States play a big role in consumer protection at the state level.
On the student loan front, they’ve enacted specific laws regarding student loan servicing that “define and enforce standards for business conduct” for the industry, they noted in the letter. Monitoring and overseeing servicers allows them to screen for possible instances where borrowers are harmed, the commissioners explained.
Focusing on the servicing aspect — not the loans themselves — involves overseeing how companies worked with borrowers on income-driven repayment plans or on Public Service Loan Forgiveness (PSLF), among other aspects. Confusion over paperwork and payments is a big reason why both those loan forgiveness programs have had such "abysmal" success rates, according to a recent National Consumer Law Center report.
During the previous administration under DeVos, ED had sharply curtailed the supervision of private companies — student loan servicers — who service federal loans with two policies.
She first asserted that states don’t have authority to oversee the loan servicers by publishing a legal interpretation that said federal laws “preempt certain state regulation of federal student loan servicers.” Second, DeVos shielded student loan records held by loan servicers from being disclosed to state regulators “based on a misinterpretation and misapplication of the Privacy Act of 1974,” the letter stated.
But these limit states from overseeing the servicing industry to the detriment of the student loan borrowers in their state, the commissioners stressed.
“Under Betsy DeVos, the Department of Education engaged in an unprecedented campaign to obstruct federal and state consumer protection officials’ efforts to oversee the student loan industry,” Seth Frotman, head of the Student Borrower Protection Center, said in a statement.
For example in California, where 3.7 million student borrowers hold about $125 billion in debt, the state's Department of Financial Protection and Innovation has been trying to regain servicer oversight.
“California has worked to fill a void left by the federal government in shielding student loan borrowers from predatory practices,” the agency's commissioner, Manny P. Alvarez, said in a statement.
But the state has still made some inroads for consumers, passing a ‘Student Borrower Bill of Rights’ last year, as well as the California Consumer Financial Protection Law, to better address the student loan crisis. The state’s former attorney general Xavier Becerra also sued DeVos in June 2020 over its mismanagement of PSLF.
If the new administration reverses the two DeVos-era policies, the commissioners said that they can do so much more, adding that they were “hopeful that this adversarial relationship will end, and that the Department of Education under the current administration will seek common goals with states. … in protecting student loan borrowers.”
Aarthi is a reporter for Yahoo Finance. She can be reached at firstname.lastname@example.org. Follow her on Twitter @aarthiswami.