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States Will Have Say in Student Loan Processing Again

— August 17, 2021

The U.S. Department of Education has reversed its policy on student loan servicing.

The U.S. Department of Education, under the Biden administration, announced the states will be given back their power to enforce federal student loan processing when servicers disregard local consumer protection laws. “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 A. Cardona said in what the Department called its “latest move to undo Trump-era policies.”

Cardona added, “We welcome public input on this interpretation and look forward to enhancing consumer protections for student loan borrowers by clarifying the relationship between federal and state law on this issue.”

The federal government pays seven vendors to collect payments from nearly 43 million borrowers on $1.4 trillion in federal student loans.  Multiple state attorneys general have sued these servicers for underhanded business practices.  In 2018, Betsy DeVos, Education Secretary under President Trump, sought to disallow these suits, saying only the federal government had the authority to oversee federal loan servicers.

States Will Have Say in Student Loan Processing Again
Photo by Karolina Grabowska from Pexels

Prior to DeVos’ decision, since 2014, states have had the right to get involved in federal oversight of student loan servicers.  Maryland and Virginia are some of the states that have established a borrower’s bill of rights.  California and Connecticut require servicers obtain a license to operate within their states.  However, not everyone agreed with the latest move.

Rep. Virginia Foxx of North Carolina, the top Republican on the House Education Committee, said Cardona’s decision will have “disastrous consequences for borrowers and will be remembered as a spectacular failure.”  Foxx said, “Forcing [federal student loan servicers] to serve dozens of state governments that contradict federal rules will create borrower confusion and worsen the borrowers’ repayment experience.  The department’s bureaucratic incompetence, combined with inherent design flaws in the Higher Education Act, are the reasons why borrowers get left behind.”

The Education Department cited in its new guidance for student loan processing an explanation as to why the reversal was being issued, saying “working collaboratively with the states instead of fighting them could produce a more robust system of supervision and enforcement to monitor and improve performance under this far-flung system.”

Maura Healey, the attorney general of Massachusetts, at one time had sued, and eventually settled with, the government’s largest loan servicer over errors that she said, “had hobbled public service workers seeking to use a loan-forgiveness program.”  She applauded the new measure.  The servicer, the Pennsylvania Higher Education Assistance Agency (also known as FedLoan) has plans to terminate its contract at the end of this year.

“States have long played an integral role in higher education oversight and have been on the front lines of protecting student borrowers from fraud and abuse,” Healey said. “My office looks forward to collaborating with the department to ensure servicer accountability and borrower rights.”


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