Contracts between borrowers and the Department of Education govern the majority of outstanding student loans, and how servicers handle them, in the United States. But a growing number of states—like California, Colorado, Connecticut, Illinois, Maryland, Maine, New Jersey, New York, Rhode Island, and Washington, to name a few—have passed laws that also regulate how servicers manage student loans. These laws, which are typically grouped together in the state statutes and categorized as a student loan “bill of rights,” are designed to protect student-loan borrowers from deceptive and misleading servicing practices.
Under most states’ student loan bill-of-rights laws, a servicer must get a license through the state. These laws also usually prohibit servicers from:
In addition, student loan laws often create new ombudsman offices to assist borrowers with their student loans. The ombudsman generally receives, reviews, and attempts to resolve any complaints from student loan borrowers, as well as answers questions about student loans.
Many of the state student loan bill-of-rights laws also establish punitive actions the state can take in instances when servicers violate the law. (To read the student loan bill of rights for Illinois, for example, go to 110 Ill. Comp. Stat. § 992. To check out Maine’s student loan bill of rights, see Title 9-A, Article 14 of the Maine Revised Statutes.)
Under the Obama administration, the federal Consumer Financial Protection Bureau (CFPB) used to collect thousands of complaints from student borrowers, including complaints about incorrect information from servicers or errors in processing payments. The agency started publishing statistics about those complaints in annual reports. But under the Trump administration, and especially under Secretary of Education Betsy DeVos, the federal government has increasingly shifted its priorities away from the oversight of loan servicers. In 2017, DeVos ended an information-sharing agreement between the Education Department and the CFPB that allowed the agency to track consumer complaints. And when loan servicers started to face pressure due to new state laws, DeVos declared that states don’t have the authority to regulate federal student loans. State legislators, however, have continued to pass these laws anyway.
While the Trump administration opposes state laws that govern servicers of federal student loans, the issue of whether states can pass and enforce these laws—called “federal preemption”—will ultimately be decided in the courts. In 2018, a judge struck down certain parts of a District of Columbia law that regulated student loan servicers, ruling that the state law was in conflict with federal law. (See Student Loan Servicing Alliance v. District of Columbia, U.S. District Court, District of Columbia, No. 18-0640 (D. D.C. Nov. 21, 2018)).
On the other hand, the Seventh Circuit and a New York federal court have rejected preemption arguments and permitted consumers to pursue state law claims against servicers for their abusive practices. (See Nelson v. Great Lakes Educational Loan Services, Inc., 928 F.3d 639 (7th Cir. June 27, 2019); Hyland v. Navient Corp., 2019 WL 2918238 (S.D.N.Y. July 8, 2019)). In Nelson, the court ruled that while the federal Higher Education Act states that loan servicers don’t have to comply with state disclosure requirements, a loan servicing company could be sued for affirmative misrepresentations. (In that case, the servicer made statements that its representatives offered expert help and that they worked on behalf of borrowers, not the company. But, the suit contended, the servicer steered borrowers into repayment plans that were to the servicer’s advantage and the borrowers’ detriment.)
On various occasions, legislation has been introduced to create a federal student loan bill of rights. For instance, in May of 2019, U.S. Senators Dick Durbin (D-IL), Elizabeth Warren (D-MA), and Jack Reed (D-RI) introduced the Student Loan Borrower Bill of Rights Act of 2019. This legislation would have set disclosure standards for private and federal student loans by amending the Truth In Lending Act. The goal of the proposed law was to make sure that struggling student loan borrowers would be treated fairly and could get information about all repayment options and resources available to them. But the legislation went nowhere.
It’s doubtful that any federal laws aimed at controlling the activities of student loan servicers will pass in the current political environment.
To find out more about laws that regulate student loan servicers in your state, if any, and to learn more about your rights as a student loan borrower, talk to a debt settlement lawyer or consumer protection lawyer with experience in this area, or a student loan lawyer.