The Biden administration revoked legal guidance issued by the Betsy DeVos-era Department of Education, knocking down an obstacle to states regulating student-loan companies.
This week’s announcement is the latest in a years-long battle between state officials, the federal government and student-loan companies over who has the authority to monitor firms hired by the Department of Education to manage the student-loan program.
During the Obama administration, states across the country began passing laws requiring student-loan companies to abide by certain rules to operate in their states. But the companies pushed back, arguing — with the backing of a Trump administration memo issued in 2018 — that states didn’t have the right to regulate these federal contractors.
The guidance issued by the Department of Education this week essentially reversed the DeVos-era memo and called it “substantially over-broad and legally unsupported.” Instead, the Biden administration guidance framed student-loan company oversight as a partnership between states and the federal government.
“Nothing in this guidance puts any requirements or onus on state governments to play a supporting role, but what it does allow is an invitation or encouragement for states to do so and for states that have already entered into the fray some political and perhaps legal cover,” said David Rubenstein, a professor at Washburn University School of Law and an expert on preemption, or the interaction between federal and state laws.
Advocates had called on the Biden administration to revoke the DeVos-era memo
The Biden administration’s memo comes as consumer advocates are watching the Department of Education closely to see how officials will approach oversight of the student-loan and higher education industries. Earlier this year, the agency issued guidance making it easier for states to access data and records held by student-loan companies as part of state officials’ oversight.
But advocates had called for more, including rescinding the 2018 DeVos memo. Seth Frotman, the executive director of the Student Borrower Protection Center, which urged the Biden administration to reverse the DeVos memo, said the Department’s decision ended a Trump administration-backed “years-long campaign by the student-loan industry to obstruct justice.”
“By standing shoulder to shoulder with the state consumer protection community, President Biden has an opportunity to put an end to the lawlessness by many in the student-loan industry and make clear it will not be tolerated,” Frotman said in a statement.
Though both the guidance announced this week and the DeVos-era memo are focused on the wonky topic of preemption — essentially the idea that federal law supersedes state law in cases where they’re in conflict — the government’s and courts’ interpretation of how preemption applies to student-loan regulations has implications for student-loan borrowers paying their bills.
For years, consumer advocates and borrowers themselves have pointed to practices by student-loan servicers they say are blocking their access to loan forgiveness they’re entitled to by law and making it more costly than necessary for borrowers to repay their student-loans.
Concerned about how these practices were impacting their residents and spotty federal oversight, state legislators began passing laws requiring student-loan companies abide by certain rules — for example, not engaging in abusive or deceptive practices — in order to operate in their states.
States as ‘first responders to emerging consumer issues’
Those efforts fit in well with how state financial regulators view their role, said John Ryan, the president of the Conference of State Banking Supervisors, an organization representing state financial regulators. That includes “the ability of states to serve as first responders to emerging consumer issues,” in some cases before they become apparent at the federal level, he said.
As more states began implementing these laws, servicers fought back and they asked the Trump administration for help. In 2017, the National Council of Higher Education Resources (NCHER), a student-loan industry trade group, wrote to Department of Education officials asking them to issue guidance saying that student-loan servicers were governed by federal — not state — law.
Several months later, the Trump administration published the memo saying that states didn’t have the authority to oversee student-loan companies because their regulations were preempted by federal law. Companies facing litigation over their servicing practices cited the Department’s guidance in court.
In a statement, Dan Zibel, the vice president and chief counsel at the National Student Legal Defense Network, described this behavior by servicers as leveraging the DeVos memo in court “to evade accountability.”
“We hope this move signals the Department of Education is moving quickly towards expanding accountability across student lending and better protecting student borrowers from being defrauded — especially during our recovery from the pandemic,” said Zibel, who argued two cases where courts at the appellate level found that borrowers and states to sue student-loan servicers over deceptive conduct.
Courts didn’t give the DeVos memo much weight, they may do the same with the Biden-era guidance
Rubenstein, the law professor, described the Trump administration’s interpretation and application of the preemption doctrine as “very dubious,” which is why courts declined to give it deference. He said it’s possible that because the guidance issued this week provides more nuance and is a “fairer representation of what Congress intended,” when it comes to states’ role in student-loan laws — and that intent is what matters most in preemption cases — that courts may give the new interpretation deference.
Even if courts don’t defer to the Biden administration guidance, it signals to courts to look more skeptically on claims of preemption brought by student-loan companies, Rubenstein said.
One of the key points of differentiation between the Biden and Trump administration memos is that the guidance issued this week acknowledges that there is nuance when it comes to preemption, Rubenstein said. For example, the Biden administration memo notes that when state and federal laws appear to be in conflict, courts engage in a careful analysis to see if the state law truly conflicts with the text and purpose of the federal law, Rubenstein said.
“In so far as the federal law is designed to create accountability mechanisms — whether through regulations or through contracts — to hold the federal loan servicers accountable then the states can actually support or play an important supporting role,” he said.
That concept echoes how the Consumer Financial Protection Bureau approached student-loan oversight under the Obama administration. Richard Cordray, who led the CFPB during that period, is now running the Department of Education’s Office of Federal Student Aid, which oversees federal student-loan servicers.
Whether the new guidance will have a big impact on how servicers do business remains to be seen, said Scott Buchanan, the executive director of the Student Loan Servicing Alliance, a trade group. Buchanan described the guidance as a “distraction” from the Department taking steps to meaningfully improve the student-loan program, including by tackling some of the nitty gritty issues that state laws are addressing, like how student-loan payments are allocated.
“We can’t have this regime of 50 states and the federal government all telling us how to run the program and all having different opinions about it,” Buchanan said. “That’s a surefire way to ensure confusion for borrowers, servicers and everyone.”
Even if the memo does have a meaningful impact on servicers, borrowers and state regulators, it’s possible it may only be temporary. While they may differ in their arguments, what both the Biden administration and Trump administration memos have in common “is they do not have the force of law,” Rubenstein said.
“It means that it can be retracted again with another stroke of a pen,” he added.