NAICU Washington Update

States Encouraged to Collaborate in Student Loan Servicing

August 11, 2021

In a new legal interpretation released earlier this week, the Department of Education revised and clarified its position on the legality of state laws and regulations that govern various aspects of the servicing of federal student loans. 

According to the Department, state laws are preempted only in limited and discrete respects and are not to be fully preempted by federal law as it relates to regulating student loan servicers. In 2018, the Trump Administration issued an interpretation clarifying that all state regulatory regimes over student loan servicers are preempted by federal law. This interpretation received an outpouring of negative feedback from consumer groups and was challenged multiple times in federal court.  The courts found that the Trump Administration’s interpretation had no merit and so did not stand. 

The Department’s new legal interpretation will help states enforce their own borrower bill of rights or other similar laws to address issues with servicing of federal student loans, but it is not universally supported in Washington. Ranking Member Virginia Foxx (R-NC), for example, issued a statement expressing her disapproval of the new legal interpretation saying it will “create borrower confusion and worsen the borrowers’ repayment experience.”

The announcement builds on the Biden Administration’s previous efforts to protect student loan borrowers and to renew partnerships with state and federal regulators. The public will have 30 days from the time the notice is posted in the Federal Register to submit comments

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