New State Laws Target Student Loan Servicers

A growing number of states are passing laws that regulate federal student loan servicers.

As the Trump administration rolls back federal regulations designed to protect people who have federal student loans, more and more states are passing laws to protect borrowers and reduce abuses by student loan servicing companies.

Generally, these new state laws require student loan servicers to get a license, as well as crack down on unscrupulous lending and servicing practices. The various laws tend to prohibit servicers from activities like defrauding or misleading borrowers, omitting material information, misapplying student loan payments, providing inaccurate information to a credit bureau, or failing to evaluate a borrower for an income-based repayment program where available.

California, Colorado, Connecticut, Illinois, Maryland, and New York, for example, have all passed legislation regulating student loan companies that operate in these states. Other states, like Maine, Massachusetts, Minnesota, Nevada, Oregon, Rhode Island, and New Jersey are also considering passing laws covering student loan servicing activities.

However, the current administration and student loan industry oppose state laws governing servicers of federal student loans, arguing that states don’t have the right to regulate these companies. The issue of whether states can pass laws that affect federal student loan servicing—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)). Other similar cases are currently going through the courts.

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, consumer protection lawyer, or a student loan lawyer.

Effective date: May 23, 2019