Last month, the Department reversed a DeVos era notice which said that federal student loan servicers were not subject to state consumer protection laws. The Devos interpretation said that states’ laws that protect borrowers from servicers’ false and misleading practices were “preempted” by the Higher Education Act (HEA). Preemption is a legal doctrine in which a state law is superseded by federal law. Servicers routinely used the interpretation to fight lawsuits brought to hold them accountable for providing false and misleading information to borrowers.
In the recent announcement, the Department clarified that the HEA does not prevent states from holding servicers accountable for improper practices that mislead and harm borrowers. It specifies that the HEA supersedes or preempts state laws only in limited and specific circumstances or when the state law conflicts with federal law.
The Department’s new interpretation is good news for student loan borrowers. The interpretation recognizes and endorses greater cooperation between states and the federal government in regulating loan servicers and enhancing protections for student borrowers. Borrowers and state attorneys general often use state laws to hold servicers accountable when they give student loan borrowers false or misleading information about their account status, IDR plans, or eligibility for federal loan forgiveness programs.
Notably, the Department’s new interpretation does not address whether the HEA prevents states from holding servicers accountable when they fail to provide borrowers with important information about their student loans. Servicers are known for not informing borrowers about loan forgiveness and loan discharges programs that would eliminate or reduce the burden of student debt. State laws that hold servicers accountable for such important omissions strengthen protections for borrowers and promote better loan servicing.
Overall, the new interpretation is a step in the right direction to protect borrowers and hold servicers accountable. This reversal signals a new era where servicers can no longer hide under the blanket of federal law and look to the Department to approve their evasion of states’ consumer protection laws.