During the Trump administration, the Department of Education (ED) and state regulators developed a frosty relationship. For those who like to think of things in pop culture terms, the connection has been more Taylor/Kanye and less Simon/Daphne.

On March 9th, 2021, in an attempt to close the sizable rift between states and ED, the California Department of Financial Protection and Innovation (DFPI) joined eleven other states in a letter sent to newly confirmed Secretary of Education Miguel Cardona. The letter, penned by the New York State Department of Financial Services (DFS), congratulated Mr. Cardona on his confirmation and invited him to partner with states in their endeavors to protect student loan borrowers. In addition to DFPI Commissioner Manual P. Alvarez, regulators from Colorado, Connecticut, Illinois, Maine, Massachusetts, New Jersey, Rhode Island, Washington, and Wisconsin added their signatures.  

In the letter, the regulators asked ED to rescind certain policies described as “harmful”, “unsound”, and which “undermine the supervision of private companies that service federal student loans.” Specifically, the regulators asked ED to reverse (1) the federal preemption of state oversight of student loan servicers; and (2) the usage of the Privacy Act of 1974  to prevent state regulators from obtaining documents and other records, including loan servicer practices, which are necessary for industry oversight. 

Why are states pushing for ED to abandon these policies?

According to the March 9th letter, “[ED] is the nation’s leading student loan originator [and] contracts with private companies to service approximately $1.56 trillion in outstanding federal student loan debt.” There are 43 million student loan borrowers across the country, and student-loan debt is the second-largest class of consumer debt behind mortgage loans.  These loans are all serviced by private companies, which are often the borrower’s sole point of contact for managing their loans. 

The letter states,

“State oversight of student loan servicers generally focuses on servicing practices, not the nature of underlying loans, which may have been originated pursuant to a federal program or by a private lender. These servicing practices include, however, the execution of certain programs that are unique to federal student loans, such as income-driven repayment plans and Public Service Loan Forgiveness – areas central to documented servicer misconduct. As borrowers’ dedicated and often sole point of contact for their student loans, both federal and private, servicers’ unwillingness or inability to provide accurate and relevant information to individual borrowers and to guide them to the most cost-effective repayment options can have disastrous effects with few opportunities for recourse. States are well positioned to supervise this industry, but our ability to do so suffers without federal allies.“

In response to unlawful industry practices documented by the New York Times in 2017, many states, including California, enacted legislation regarding student loan debt oversight to protect consumers from harm. However, former Secretary DeVos’ policy positions have entirely cut off states’ attempts to gain visibility into student loan servicers’ practices, leaving regulators very much in the dark. 

“Over the past few years, California has worked to fill a void left by the federal government in shielding student loan borrowers from predatory practices.” Said DFPI Commissioner Alvarez, “With the confirmation of Secretary Cardona, we look forward to working anew with federal partners to protect California borrowers and help mitigate the ongoing student loan debt crisis.”

insideARM perspective

Two of the many complications involved in effective oversight of a $1.56 Trillion portfolio is that multiple technology platforms are involved, and there are dozens of loan programs, all with specific technical eligibility and process requirements. As a result, in 2017 ED initiated a project to develop a NextGen program, including a complete overhaul of technology, process, and contractors. The program had an extremely aggressive timeline which would be difficult even for the largest private company to meet. Progress has been made, but there have been changes in key leadership (including, of course, at the very top) and litigation over contract awards which have surely caused delays.

As for the relationship between the regulators, now that the Biden Administration has taken the reigns and Secretary Cardona has been confirmed, it would not be a surprise to see a more symbiotic relationship develop. Also, should Rohit Chopra, President Biden’s nominee for CFPB Director and former CFPB Student Loan Ombudsman, be confirmed, it is not far-fetched to imagine a scenario where he lends a helping hand.

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