The new interpretation replaces a 2018 policy on preemption of federal student loan servicing laws over state student loan servicing laws and takes effect this week.
The U.S. Department of Education (DOE) has released updated information on the balance between federal and state oversight of student loan servicers.
“A new legal interpretation that revises and clarifies [the department’s] position on the legality of state laws and regulations that govern various aspects of the servicing of federal student loans … will help states enforce borrower bills of rights or other similar laws to address issues with servicing of federal student loans,” according to a news release from the DOE.
In July, the Conference of State Bank Supervisors and North American Collection Agency Regulatory Association issued a letter to Education Secretary Miguel Cardona applauding recent steps by the DOE toward recognizing state authority but calling for more action to stop preemption over state regulation, ACA International previously reported.
According to the DOE, “the proposed notice clarifies that while federal law does preempt state regulation in certain narrow areas, states can regulate student loan servicing in many other ways without being preempted by the federal Higher Education Act (HEA).”
The interpretation notice will take effect this week, but the department is also seeking public comment on the notice for the next 30 days so it can identify any additional changes that may be needed. A comment deadline will be available upon publication of the notice in the Federal Register, which is expected to be this week. The proposed notice of interpretation can also be found here.
“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,” Cardona in the DOE news release. “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 proposed notice replaces a previous notice of the interpretation posted in the Federal Register on March 12, 2018.
“The department has reconsidered the issues of preemption and the place of the states in regulating federal student loan servicers and revokes the 2018 interpretation as substantially overbroad and legally unsupported,” the notice states. “Preemption issues are necessarily contextual and fact-specific, and the law does not support the sweeping claims made in the 2018 interpretation that federal law broadly preempts state authority over federal student loan servicing under principles of field preemption, express preemption, or conflict preemption.”
Federal student loan payments are currently on hold through Jan. 31, 2022. The extension was recently updated to go into next year and the DOE reports it is the final extension of the payment forbearance.
The state regulators who called for rescinding the preemption policy said it is important to do it now to ensure borrower protections once the payments resume.
Projects under Richard Cordray’s leadership as chief operating officer (COO) at Federal Student Aid are expected to include managing the DOE’s student loan forbearance, ACA previously reported. Cordray will also oversee new contracts with student loan servicers for federal student loan payments.
The DOE selected Cordray as COO of Federal Student Aid under the Biden administration. Cordray is the former director of the Consumer Financial Protection Bureau and the former Attorney General of Ohio.