Dept. of Education issues new interpretation on preemption of state laws regulating student loan servicers

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The U.S. Department of Education has issued a new interpretation “to revise and clarify its position on the legality of State laws and regulations that govern various aspects of the servicing of Federal student loans.”  The new interpretation revokes and supersedes the ED’s 2018 preemption determination.  It was not unexpected, as the ED has taken a number of steps in recent months to reverse Trump Administration policies that hindered state oversight of federal student loan servicers.  Although the interpretation will be effective on the date of its publication in the Federal Register, the ED is seeking comment “so it can identify any additional changes that may be needed.”  Comments must be filed no later than 30 days after the publication date.

Underlying the new interpretation is the “overarching principle” that:

[T]he States have an important role to play in this area and it is appropriate to pursue an approach marked by a spirit of cooperative federalism that provides for concurrent action according to a concerted joint strategy intentionally established among Federal and State officials.  Accordingly…the Department believes that there is significant space for State laws and regulations relating to student loan servicing, to the extent these laws and regulations are not preempted by the Higher Education Act of 1965, as amended (HEA), and other applicable Federal laws.

The conclusion reached by the ED is that state laws regulating the servicing of federal student loans “are preempted only in limited and discrete aspects as further discussed in this interpretation.”  The ED finds that the 2018 interpretation’s approach to preemption is “seriously flawed” and for the reasons given in the new interpretation, the ED states that it “is changing its approach to preemption of State student loan servicing laws that was laid out in the 2018 interpretation.”

The ED gives the following key reasons for its new interpretation:

  • Preemption is at its weakest in areas where states assert they are acting under their general police powers for the purpose of protecting their citizens.  In the ED’s view, such areas include student loan servicing laws, and education has been long regarded as a subject for the exercise of predominately state powers.
  • The 2018 interpretation found that federal law preempts the entire field of law relating to federal student loan servicing.  At no time before issuing the 2018 interpretation did the ED take the view that field preemption applied to the servicing and collection of federal student loans and the courts have held that the ED did not provide persuasive reasons for its position.  After reexamining the issue of field preemption, the ED rejects the 2018 interpretation’s analysis and concludes that field preemption does not apply to the servicing and collection of federal student loans.
  • The 2018 interpretation also based preemption of state student loan servicing laws on the ground that the HEA expressly preempts state laws requiring federal student loan servicers to provide information not required by federal law.  The ED determines that the 2018 interpretation failed to distinguish between satisfying HEA disclosure requirements and conveying accurate information so as not to mislead a borrower.  In reconsidering the issue of express preemption, the ED finds that, except in the limited and specific instances expressly set forth in the HEA, state student loan servicing laws are not expressly preempted by the HEA.
  • Implied conflict preemption only applies where there is a direct conflict between state and federal law, which in the ED’s view is limited to state laws that would allow for the revocation of state licensing of federal student loan servicers.  According to the ED, recent court decisions considering conflict preemption have consistently determined that the HEA places no emphasis on maintaining uniformity in federal student loan servicing and have upheld state authority to address fraud and affirmative misrepresentations.
  • Case law does not support the uniformity argument made in the 2018 interpretation as the basis for finding that state laws prohibiting affirmative misrepresentations by servicers of loans made under the Direct Loan Program are preempted by general disclosure requirements in federal law.
  • For Federal Family Education Loan Program (FFEL Loans), while federal law preempts state laws that conflict squarely on issues such as timelines, dispute resolution procedures, and collections, the ED concludes that it does not preempt state laws relating to affirmative misrepresentations as well as other measures intended to address improper conduct that may occur in FFEL Loans and that do not conflict with federal law.
  • The 2018 interpretation sought to justify how the ED could provide adequate oversight of federal student loan servicers on its own.  A different approach in which there is a coordinated  partnership between federal and state officials is, in the ED’s reconsidered view, more likely to succeed.  In describing what this new approach means, the ED states:

Rather than viewing [State attempts to address customer service issues] as inconvenient or detrimental to its objectives, the ED now recognizes that State regulators [and State attorneys general] can be additive in helping to achieve the same objectives championed in the 2018 interpretation.  Rather than expending time and effort contesting the authority of the States in unproductive litigation, the Department intends to work with the States to share the burdens and costs of oversight to ensure that loans servicers are accountable for their performance in better serving borrowers.

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