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Department Issues Notice in Favor of State Oversight of Servicers

August 10, 2021
 
 

Individual states are able to regulate federal student loan servicers in most circumstances without being preempted by the Higher Education Act of 1965, according to a notice of interpretation issued Monday by the Department of Education.

The new notice replaces an interpretation put into place under former secretary of education Betsy DeVos, which said the HEA and federal law limits the ability of states to conduct oversight over student loan servicing companies. The National Student Legal Defense Network said this action "severely limited states' ability to regulate and take enforcement action against student loan servicers" and advocated for a reversal of the interpretation.

"The repeal and replacement of the DeVos Notice is a major win for student borrowers and opens the door to greater oversight of student loan servicers who leveraged the Notice in court to evade accountability," said Dan Zibel, vice president and chief counsel at Student Defense, in a statement. "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."

The department said the new interpretation will help facilitate collaboration among the states and federal government to help protect student borrowers, but Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators said the policy change may cause more confusion instead.

"For years, NASFAA and other advocates have been calling on the Department of Education to issue one, standardized set of policies and procedures on student loan servicing," Draeger said. "Allowing states to preempt federal standards based on where student loan borrowers attended or where they live sounds operationally challenging, creates confusion for students and works against the idea of a single, unified loan servicing manual."

North Carolina Representative Virginia Foxx, the top Republican on the House Education and Labor Committee, said the interpretation could hurt borrowers more than it will help them.

"Federal student loan servicers work for the federal government and their assigned borrowers," Foxx said. "Forcing them to serve dozens of state governments that contradict federal rules will create borrower confusion and worsen the borrowers' repayment experience."

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