Student loan companies to feds: Tell states to stop regulating us

The request comes as a number of states consider proposals to license student loan servicers

Over the past few years, lawmakers in Maine, California, Illinois and elsewhere have worked to pass state laws that would require student loan companies to abide by certain rules as a way to protect borrowers. Now these companies are asking the federal government to tell states to stop.

The National Council of Higher Education Resources (NCHER), a trade group that represents student loan servicers and debt collectors, sent a letter to the Department of Education last week urging the agency to issue guidance which “clearly states” that student loan servicers are governed by the Department and other federal agencies and that those rules pre-empt state laws.

James Bergeron, the president of NCHER, said he’d like to see the Department intercede on behalf of his members. Federal student loan servicers “have to provide a service for 44 million borrowers. To do things for some borrowers in Illinois, a different thing for borrowers in California, something else different for folks in Maine — it is a federal program and it gets confusing,” he said.

The government contracts with companies to service federal student loans and in exchange for that lucrative business, the firms are required to follow parameters specified in the contract. For years, borrower advocates have complained that student loan servicers don’t work in borrowers’ best interest in part because the contracts don’t incentivize them to do so.

n that environment, states, beginning with Connecticut in 2015, started enacting legislation requiring servicers to abide by certain consumer protections. That effort has picked up over the past several months as borrower advocates grow increasingly concerned that Betsy DeVos’s Department of Education will do little to protect borrowers from mistreatment at the hands of servicers.

“We’re just seeing servicers putting their bottom line over the concerns of students and borrowers and their families,” said Whitney Barkley, the legislative policy counsel at the Center for Responsible Lending, a nonprofit that works to curb harmful lending practices. “There’s clearly been a breakdown somewhere in federal oversight and the folks who are charged with overseeing the servicers at a federal level haven’t done a good job.”

State lawmakers working on these bills say they feel a responsibility to constituents to hold these companies accountable. Though the bills aren’t all the same, many include provisions requiring servicers to become licensed in their state and ban them from misleading borrowers and applying student loan payments in a way that’s contrary to the instructions of the borrower, among other practices, as a condition of keeping the licenses. Many of the bills also include proposals to create an ombudsman to field and adjudicate complaints brought by borrowers.

“I don’t know what the servicers are afraid of,” said Kenneth Zebrowski, a Democratic lawmaker in New York state’s assembly who introduced a student loan bill of rights earlier this year. “Unless protecting students from fraud and unscrupulous practices is complex to these companies, I don’t really understand what their objection is,” Zebrowski added, referring to the contention in the letter that complying with state regulations would make the federal student loan system unnecessarily complicated.

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