The U.S. Department of Education says states don’t have the legal authority to regulate the industry, but Washington state Attorney General Bob Ferguson disagrees.
The ink is barely dry on a new law that will regulate student-loan servicers in Washington, but the state could soon be drawn into a legal fight with the U.S. Department of Education, which claims states have no authority to regulate the industry.
In passing a student-loan bill of rights this year, Washington joined a wave of other states that are cracking down on the private companies that handle the paperwork after a student graduates and begins paying off his or her student loan.
The new Washington law requires student-loan servicers to be licensed by the state and creates a student-loan advocacy office.
Student-loan servicers are big business: The Department of Education pays nearly $1 billion a year to about a dozen companies to collect the $1.38 trillion in outstanding federal student loans owed by about 43 million Americans.
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In Washington, it’s estimated 800,000 people — one of every seven adults — owes a collective debt of $24.4 billion in student loans.
According to state Attorney General Bob Ferguson, a Democrat who has taken on the Trump administration on a number of issues, the servicers have a record of making paperwork mistakes, aggressively collecting on loans and pushing students into more expensive payment plans.
At least three other states — California, Connecticut and Illinois — have enacted legislation regulating student-loan servicers, and other legislatures are considering it.
But at the federal level, efforts are under way to curb the states’ powers.
This month, the Department of Education issued a notice in the Federal Register warning that it believes state legislation regulating student-loan servicers is pre-empted by federal law. In addition, a federal bill to reauthorize the Higher Education Act would pre-empt student-loan originators, servicers and debt collectors from state-level oversight and enforcement.
Having different regulations at the state level creates a confusing patchwork of policy, argues the Student Loan Servicing Alliance, which represents the industry.
Despite the threat of a legal challenge, Gov. Jay Inslee signed the bill into law last week.
The Department of Education did not respond to requests to explain how or when it might take Washington to court.
Ferguson said he believes the federal agency is wrong.
Secretary of Education Betsy DeVos’ interpretation, he wrote in a statement, “prioritizes the interests of those who treat borrowers unfairly over those struggling to repay student loans … I disagree with their analysis, and look forward to defending the Student Loan Bill of Rights in court.”
Washington Sen. Patty Murray, ranking member of the Senate’s Health, Education, Labor and Pensions Committee, also weighed in. Accusing DeVos of “putting student loan companies ahead of students,” she said in a statement that she was proud of Washington for passing the law.
“Secretary DeVos’ latest move to invalidate students’ protections at the state level is concerning and telling, and I hope the Republicans who claim to care so deeply about states’ rights will join me in fighting back against this overreaching and harmful decision,” Murray wrote.
This month, a bipartisan group of 30 state attorneys general, including Ferguson, urged Congress not to pre-empt state laws. Such a move would “wrongly interfere with traditional state police powers and potentially harm the students and borrowers who rely on the federal student loan program,” they wrote.
It’s not Ferguson’s first battle against student-loan servicers. Last year, his office sued the nation’s largest federal-loan servicer, Navient, accusing the company of using deceptive, unfair and predatory lending practices and of unfairly pushing expensive, high-interest-rate loans on borrowers who had little chance of repaying them. Navient has denied the allegations.
Ferguson’s office has collected hundreds of complaints about student-loan servicers in the past five years, including one from Nicole, a South King County resident, who filed a complaint about Navient in 2017.
Nicole, who asked that her last name not be used because she did not want her financial information widely shared, attended a for-profit college that later went out of business, leaving her with a useless degree and $26,000 in student-loan debt.
She said via email that Navient pushed her into loan forbearance — temporarily stopping payments on her loans — several times without giving her a complete understanding of how interest would continue to accrue, or offering her better options, such as paying a percentage of her income each month under a plan known as “income-driven repayment.”
One of her loans went to a collection agency, General Revenue, whose parent company is Navient. That company later made harassing calls to members of her family, she said, telling them she was “in trouble.” But when she called and tried to set up payments, she was told her loan was in “client research,” a state of limbo in which she couldn’t make payments — yet her loan continued to accrue interest.
Nicole said she’s been on the phone weekly to try to resolve the issue, and believes General Revenue is purposefully stringing her along.
“At this point, I’m trying to just set up minimum payments I can afford to keep it from affecting my credit and to keep the collection from going any further,” Nicole said.
Nikki Lavoie, a spokesman for Navient, said that the company makes it clear in “virtually every communication” that borrowers have the option to pay based on their income, and that the number can be as low as zero dollars per month. A loan goes to a collection agency only if the borrower defaults by not paying on a student loan for 360 days.
She said she could not comment on a specific case without permission from the borrower.
The student-loan bill of rights has two major components: It creates a student-loan advocacy office — an office Washington residents can call when they are having trouble with a loan servicer or want more information on how best to repay a loan — and it requires the roughly one dozen servicers of federal student loans to be licensed by the state.
One of the most frequent complaints about student loans is that the payback options have grown more confusing. The advocate will help walk borrowers through all of their options, said Ellen Austin Hall, a senior policy analyst with the Attorney General’s Office.
Servicers will be licensed by the state’s Department of Financial Institutions (DFI), which already regulates residential mortgage-loan servicers, mortgage brokers and consumer-loan companies.
Student-loan servicers will be required to follow rules similar to the ones DFI already enforces with the mortgage and consumer-loan industries, such as responding to requests for information promptly, crediting payments within one business day, providing borrowers notice when a loan is transferred to another servicer and refunding fees when the servicer is at fault.
The law sets aside $245,000 to set up the student-loan advocate office, which will be run by the Washington Student Achievement Council, a state agency that sets higher-education policy. In subsequent years, licensing fees will pay for the office.
Because the student-loan advocate office won’t be up and running immediately, students who are having trouble with their loan servicers now should continue to contact the state Attorney General’s Office for help, Austin Hall said.
Yasmin Trudeau, legislative director for the Attorney General’s Office, warned borrowers to beware of companies that offer to assist in straightening out loan payments for a fee. “You should not be charged” for that help, Trudeau said. “That’s red flag number one.”
Nicole said she’s been following news about the student-loan bill and about the Department of Education’s response to state regulations. If the state law had been in effect when she first started having trouble, she said, she believes she wouldn’t be in the position she’s in today.
“If I had someone able to walk me through all of the processes (and not confused me even more), my loans might be paid off today,” she wrote.