Home Personal Finance States to DeVos: We’ll keep cracking down on student-loan companies
A few years ago, Connecticut state representative Matt Lesser helped kick off a movement among state lawmakers across the country to regulate student loan firms. Now Lesser, a Democrat, and many of those officials are defending their efforts amid reported threats from the federal government.
In 2015, thanks to legislation shepherded by Lesser, Connecticut became the first state to require student loan servicers — the companies that manage payments for borrowers — to have licenses and abide by certain consumer protections in order to operate in the state. Soon after, several states began working to create similar laws.
Now, with regulations on the books in three states and Washington, D.C. and efforts underway in several others, the Betsy DeVos-led Department of Education may issue guidance claiming states don’t have the authority to oversee companies that collect federal student loans, according to multiple reports. A Department of Education spokesperson didn’t respond to a request for comment on the reports.
But Lesser and his colleagues across the country don’t appear to be standing down. “If the Trump administration decides against better counsel to go ahead with this idea, I think you’ll see some strong action out of Connecticut,” he said. “We’re going to be making sure that we continue to protect the law and we stand up for our rights as a state.”
In Illinois, which recently passed a borrower’s bill of rights over the governor’s veto, the Attorney General Lisa Madigan vowed in a statement to “continue to fight the fraudulent and abusive practices in this industry.”
“The DeVos Department of Education is trying to do everything it can to shield the profits and bad behaviors of student loan companies, but the Department does not have the authority to prevent Illinois and other states from enforcing and enacting state laws to protect student loan borrowers,” she said.
The attorney general of Massachusetts, Maura Healey, expressed a similar sentiment, saying in a statement that she’d continue her probes into student loan companies. Healey filed a lawsuit last year accusing a student loan servicer hired by the government of delaying debt forgiveness for public servants. Lawmakers in her state have also introduced legislation requiring student loan servicers to be licensed.
“Secretary DeVos can write as many memos as she wants, I will not shut down my investigations or stand by while loan servicing companies rip off students and families struggling with unaffordable debt,” Healey said in the statement.
And in California, which passed legislation regulating student loan companies in 2016, the state’s Attorney General Xavier Becerra said his office is “evaluating all of our legal options to respond to this reported attempt by Secretary DeVos to neuter the states.”
Hazel Crampton-Hays, a spokeswoman for New York Governor Andrew Cuomo, called the Department of Education’s reported guidance “offensive to students” and “illegal and unenforceable” in a statement, adding that the state would fight it. In New York, lawmakers have introduced legislation that would regulate student loan servicers. The governor also proposed requiring student loan companies operating in the state to be licensed and live up to certain consumer protection standards.
“Make no mistake, this action is meant to ensure that state consumer protection laws don’t get in the way of student loan companies and debt consultants ripping off students,” Crampton-Hays said in the statement.
What’s in the interest of students and graduates?
The battle comes as consumer advocates worry that DeVos and the Trump administration aren’t doing enough to protect student loan borrowers from predatory practices by companies. Since assuming her post, DeVos’s Department of Education has walked back Obama-era provisions curbing fees for struggling borrowers and laws aimed at making students who believe they were scammed by the colleges whole.
But even before DeVos took over, advocates complained that the student loan companies hired by the federal government don’t do enough to work in borrowers’ best interest in part because the government’s contracts with the firms don’t incentivize them to do so. Amid what they saw as a void of regulations on the companies, state lawmakers started pursuing their own.
As more states began pursuing these laws and some came closer to enacting them, the student-loan industry fought back, both through lobbying of local lawmakers and by asking DeVos to inform states they didn’t have the authority to make these laws. The industry has argued that the state efforts could create a confusing patchwork of regulations across the country. According to reports from Bloomberg and Politico she may be close to heeding their wishes.
The Department is reportedly considering releasing a memo that argues that the federal regulations supersede state law when it comes to overseeing student loan servicers. The memo hasn’t been made public, but if it follows arguments the Department of Justice made in recent court filings, officials are essentially saying that state laws are in conflict with the federal purpose when it comes to these issues.
What’s in the interest of the federal government?
Whether a court agrees with that assessment could come down to a question of framing, said David Rubenstein, a professor at Washburn University School of Law and an expert on preemption or the interaction between federal and state laws.
“You say, ‘Well, what is the federal interest?’ and that’s a very broad question,” he said. Parties will look to statutes, the legislative history and other sources to frame the scope of the federal interest and, depending on how they do it, they’ll get a different answer, he said.
Lawmakers and advocates with states where student loan laws are either on the books or being explored aren’t buying the Department’s framing. They say it sounds similar to arguments made by industry lobbyists in state houses across the country as they tried to push lawmakers to vote against creating these laws.
Abe Scarr, the director of Illinois PIRG, a consumer advocacy group, says he sees these kinds of arguments all the time, and they don’t necessarily hold up under scrutiny. But “they give at least an excuse for some legislator to hold on to, to oppose something,” said Scarr, who helped advocate for the student loan law in Illinois.
What are states doing to balance student and federal interests?
Despite the arguments, state lawmakers are sticking by the notion that they have a right to enact common sense consumer protections for their residents and, when it comes to these issues, federal regulations are a floor, not a ceiling.
“It’s certainly troubling to see the feds trying to interfere with the legislation that we just passed,” said Will Guzzardi, a state representative in Illinois, which recently passed its own borrowers’ bill of rights with bipartisan support. “I and my fellow lawmakers, we believe in this legislation very firmly, we’re going to everything we can to ensure that it stands.”
Eloise Vitelli, a Democratic Maine state senator who has been shepherding a bill to regulate student loan servicers through her state legislature says she feels the same way.
“It seems like a step too far,” she said. “We think that there’s still a role for the states to play in protecting our borrowers.”
For what it’s worth, Mick Mulvaney, the Trump-appointed head of the Consumer Finance Protection Bureau who many have criticized as too favorable to industry, seems to agree. He told a room of attorneys general Wednesday that his agency would be looking to the states for leadership when it comes to enforcement of consumer protection laws.
“Why we think we know better or how to protect consumers in your state surprises me,” he said, according to American Banker. “I don’t think we’ll being do much of that anymore.”
For now, Maggie Thompson, the executive director of Generation Progress, the youth-arm of the Center for American Progress, a left-leaning, said she’s encouraging states to ignore the memo and will be watching to see which state challenges it first. Her organization has worked with advocates across the get these laws enacted.
The conflict between state laws and the federal guidance will likely play out in a courtroom if a state finds a student-loan company in violation of its laws, Rubenstein said. In that case, the company may use the memo to argue the laws are invalid. But the existence of the memo doesn’t change the legal situation on the ground. It “is not itself a law, it’s essentially a glorified press release,” he said. “All this guidance is going to do is it’s going to put people on notice that this is the government’s position.”