College hat, diploma and money

Sixteen state attorneys general led by New York Attorney General Barbara Underwood are siding with the District of Columbia in a lawsuit brought by the Student Loan Servicing Alliance.

The loan servicing alliance is opposing a district law that regulates loan servicers, arguing that its enforcement is preempted by federal law, a position also supported by the U.S. Department of Justice, which filed a “statement of interest” in the case.

The filing by state attorneys general in an amicus brief to the U.S. District Court in D.C. is the latest in a series of legal moves, including lawsuits, opposing federal policies that weaken protections for student loan borrowers.

State attorneys general have opposed the Department of Education’s failure to implement the Gainful Employment Rule, which targets for-profit colleges whose graduates have a heavy load of student debt, and its proposed changes to the DOE’s borrower defense regulations, which let student loan borrowers defrauded by their school discharge their loans.

In their court brief, the coalition of state attorneys general note that the federal government’s position in the latest lawsuit “represents a sharp departure from its longstanding view that the states play an important role in regulating student loan services.”  

Until 2017, federal contracts with loan servicing companies typically required that loan servicers comply with federal and state laws and regulations, according to the brief and federal and state agencies agreed to continue sharing information about loan servicing issues.

“Pre-empting state laws in the field of student loan servicing will remove an important protection that has proven critical to identify and obtain remedies for servicer misconduct,” the brief states. It would leave the federal Department of Education as the sole agency overseeing student loan servicers even though the federal government lacks “clear federal servicing standards,” according to the brief which cites reports from the General Accounting Office, the Consumer Financial Protection Bureau and most recently (July 2018) the U.S. Treasury.

“State laws and enforcement are critical to protect borrowers, particularly in the absence of effective federal regulation,” according to the brief. “Pre-empting state law here would lead to dramatically more servicer misconduct.”

Between September 2016 and September 2017, the CFPB reported receiving nearly 13,000 complaints concerning federal student loan servicers.

Student loan debt in the 16 states that filed the brief totals close to $530 billion, or almost 40% of the $1.4 trillion in student loan debt outstanding. California and New York state accounted for 40% of the $530 billion debt load. 

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