There’s a fight brewing between states and Secretary of Education Betsy DeVos over who has the power to police student loan servicing companies as consumer advocates question whether the federal government is doing enough to protect borrowers from shady practices.
Democratic attorneys general from 20 states and Washington, DC, sent a letter to the secretary last week saying the Department of Education is blocking access to records requested by law enforcement.
“The department’s policy reversal impedes states’ ability to enforce the law and shields unprincipled industry actors from regulatory enforcement, harming student loan borrowers nationwide,” the letter reads.
The department has cited privacy reasons when rejecting requests for information over the past year, the attorneys general wrote.
The Department of Education argues that it’s best for the federal government to monitor the system – a departure from DeVos’ stance about state power on other education issues. She’s argued that it should be left up to the states to decide whether teachers have guns in the classroom and to set discrimination rules for private schools that receive public funding.
“Federal loans are federal assets and therefore must be controlled and regulated by the federal government,” said Elizabeth Hill, a spokeswoman for the department, in an emailed statement.
“A piecemeal, state-by-state approach to regulating federal assets causes confusion for borrowers, makes administration of the loan program more complicated and costly, and thwarts Congress’ goals that the program be administered at the federal level,” she added.
DeVos is due to testify Wednesday at the House Education and Labor Committee, where lawmakers are expected to ask her a broad range of questions about the policies and priorities of the department.
A recent report from the department’s inspector general raised questions about federal oversight at a time when the amount of outstanding student loan debt has topped $1.5 trillion – surpassing credit card and auto loan debt.
Many borrowers complain that it’s difficult to navigate the confusing system that offers several different repayment plans. The report found that the department “rarely used” the contract provisions to hold servicers accountable when they weren’t complying with federal rules. The department disagreed with the report’s findings.
State officials say that both federal and state oversight is needed over the loan servicers, which are hired by the Department of Education to manage the federal student loan program. Some of the servicers are nonprofits, but two of the biggest are private companies, Nelnet and Navient.
For years, states have been stepping up to strengthen their own protections for student loan borrowers. In 2015, Connecticut became the first state to adopt a “student loan bill of rights.” It created the position of a student loan ombudsmen to help resolve complaints from borrowers and established licensing requirements for servicers. Five other states have adopted similar legislation since then, according to the National Conference of State Legislatures.
Lawmakers in 14 states have introduced bills this year, as fear grows that the department is scaling back borrower protections. Under DeVos, the department ended an agreement with the Consumer Financial Protection Bureau to share information from loan companies, it’s fought state oversight in court and last year it issued a rule that says state regulations are preempted by federal law.
“The department’s actions are like throwing sand in the gears, slowing down state law enforcement investigations aimed at protecting student loan borrowers,” said Seth Frotman, a former student loan ombudsman for the Consumer Financial Protection Bureau who resigned last year and started a nonprofit called the Student Borrower Protection Center.
“It’s very apparent now that if states don’t step up, no one will be overseeing this market,” he added.