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What To Know About State Regulations On Student Loans

December 29, 2018

Federal and state regulators are working to protect student loan borrowers from unfair lending practices. To date, six states and the District of Columbia have increased efforts to reduce deceptive lending practices by student loan servicers – companies that collect payments, respond to customer service inquiries and perform other administrative tasks – as federal regulations are being rolled back by the Trump administration, according to the New York Times.

To combat these state efforts, the U.S. Department of Education filed a Statement of Interest in March. "State regulation of the servicing of Direct Loans impedes uniquely Federal interests," the filing said. Additionally, the department insisted that separate state regulation "undermines uniform administration of the program."

"Federal loans are federal assets and therefore must be controlled and regulated by the federal government," Elizabeth Hill, a spokeswoman for U.S. Secretary of Education Betsy Devos, told the New York Times. However, private student loans differ in that they are regulated by both federal and state governments.

Here's what borrowers need to know about the role states play.

States can't easily pass regulations on federal student loan servicers. Many states are unhappy with federal oversight of student loan servicers and argue that federal rules don't go far enough to ensure good outcomes for student borrowers.

These states are attempting to implement new regulations that would require direct loan servicers to obtain state licensure to service federal student loans in each state, in the hopes that these requirements would go further than federal regulations currently do to protect borrowers from predatory lending or poor loan servicing.

However, it is the U.S. Department of Education's job to regulate both public and private student loan servicers, and states will have a difficult time establishing jurisdiction in this area. 

There have been federal efforts to increase protections. Despite the federal government's stand that states have no jurisdiction in this area, it has reacted to pressure to increase protections. For example, the office of Federal Student Aid implemented an Ombudsman Group. According to FSA, the Ombudsman Group is an unbiased and confidential resource for when borrowers have issues with their federal student loans.

The Ombudsman Group is a neutral contact, meaning they do not serve as an advocate; rather, they are a truth seeker for both sides. They evaluate the evidence and help both parties come to a resolution. Contacting the Ombudsman Group is recommended as a last resort to resolve a dispute with your federal student loan servicer.

States do have power to make changes. Attorneys general from 18 states and the District of Columbia successfully sued DeVos last year over her decision to block the borrower defense rule from taking effect. The rule was intended by the Obama administration to help students who have been defrauded by for-profit colleges get relief from their student loan debt.

As a result, a federal judge ordered immediate implementation of the borrower defense to repayment rule.

Since 2015, several states have enacted their own student loan "bill of rights" or created their own ombudsman or something similar, including Washington, California, Illinois, Connecticut and the District of Columbia. Virginia is the most recent state to establish a student loan ombudsman. 

And in Massachusetts, legislation to create a student loan ombudsman for the state, allow state enforcement against student loan servicer fraud and malpractice, and enact a student loan bill of rights awaits approval by the state House of Representatives. It passed the Massachusetts Senate unanimously in April. 

Student loan borrowers can take steps to protect themselves. Borrowers can take action to protect themselves and stay on top of their student loan repayment. If your state does not already have student loan protections in place, you can file complaints with the Consumer Financial Protection Bureau. 

Borrowers should know who their servicers are and how much they owe, and make sure they understand their repayment options and the protections that they are entitled to with federal and private student loans. There is help available for student loan borrowers who are struggling with their current repayment plan. Be sure to make your payments on time, and if you are struggling, reach out for assistance.

Although many states are fighting to ensure that strict regulations are in place to help protect student borrowers, recent comments from DeVos indicate that the federal government is aware that the current situation badly needs improvement.

"Student loan debt is now a crisis," she said in a recent speech, noting that if improvements aren't made soon, the student loan program will be in "serious jeopardy."

The Student Loan Ranger suggests now more than ever, it's important to check the legislation in your state and stay informed on how states are creating protections and putting pressure on the federal government to provide more relief for student loan borrowers.