The legal landscape of student loan servicing and for-profit schools is a bit like the Wild Wild West right now. There aren’t a whole lot of rules and oversight, and unfair and deceptive practices towards student loan borrowers are fairly widespread. And in our federal legal system, where we have parallel government structures at the federal and the state level, we are seeing a major divergence in prioritizing student loan borrower protections.
One the one hand, the federal government has been actively undermining the few student loan protections that had already existed. Education Secretary Betsy DeVos rescinded Obama-era guidance that was intended to incentivize better treatment of student loan borrowers by servicers, and her administration has been trying to gut student loan forgiveness protections available to people who were defrauded by their schools. At the same time, the Consumer Financial Protection Bureau (CFPB) has, under new leadership, effectively decimated its student loan oversight unit. Suffice it to say, right now the federal government is not doing much of anything to protect student loan borrowers.
But at the same, states are stepping in. State attorney general’s office are playing a big role in advocating for student loan borrowers by bringing lawsuits against servicers such as Navient and FedLoan Servicing. And state legislatures have also been stepping up and trying to pass new legislation that offers protections for borrowers at the state level. A handful of states have already passed state-level “bills of rights” specific to student loan borrowers. And more may be coming.
New York Proposes Student Loan Protections
New York Governor Andrew Cuomo has proposed sweeping new legislation to address unfair and deceptive practices in student loan servicing and the for-profit college industry. The legislation would create a licensing system for student loan servicers that operate in New York, subjecting them to greater regulatory oversight. It also would mandate greater transparency in the for-profit college industry and would prohibit such schools from relying too heavily on taxpayer-funded financial aid. Similar legislation has been proposed in prior years but failed to pass. Now, with unified one-party control of the state government, the likelihood that these proposals will become law has increased substantially.
Massachusetts Still Could Pass the Student Loan Bill of Rights
Last year, Massachusetts State Senator Eric Lesser and State Representative Natalie Higgins proposed a Massachusetts Student Loan Bill of Rights. The legislation would have created a state licensing and regulatory structure specifically for student loan servicers. The bill also would have created a state Ombudsman’s office to collect data, field and resolve complaints from borrowers, and enforce the bill’s provisions. While the bill passed the state senate, it ultimately died without becoming law. The bill could be reintroduced again during the new legislative session.
Other States Have Moved Forward With Student Loan Protections
Illinois passed a comprehensive student loan bill of rights, as has Connecticut, the District of Columbia, and a few other states. Many other states are also considering passing student loan protection legislation including Virginia and, most recently, Colorado.
What Will the Feds Do?
The federal government opposes these efforts by states to protect student loan borrowers, arguing that federal law trumps state law, and that the states have no authority to regulate companies that act as agents and contractors of the federal government.
Last year, congressional Republicans proposed the PROSPER Act. While the bill was more widely known for its provisions that would have repealed Public Service Loan Forgiveness and drastically changed income-driven repayment, it also would have prohibited states from pursuing federal student loan servicers via state law. The PROSPER Act did not pass and it is highly unlikely to pass in the current divided Congress, but it is indicative of the federal government’s position.
Meanwhile, the Dept. of Education has been trying to intervene in state litigation against student loan servicers, arguing that states don’t have a right to do what they’re doing. This issue will likely be ultimately decided by the courts – and potentially, the Supreme Court.
