March, 2018
Washington -- The New York Times is as perturbed as I am about the Betsy DeVos attempt to preempt state laws on consumer protections for student loan borrowers. The attempt is downright unconstitutional.
At a hearing Tuesday in the House of Representatives, Secretary DeVos was at a loss to explain who made the decision to try to preempt. She could have said "I did," but that would not be true. She is the instrument of the governing Iron Triangle, but that is also not something to admit. See Iron Triangle, Part V, as to how the decision came about.
The Sunday NYT editorial:
Education Secretary Betsy DeVos made clear even before taking office last year that she was more interested in protecting the companies that are paid by the government to collect federal student loan payments than in helping borrowers who have been driven into financial ruin by those same companies.
Ms. DeVos’ eagerness to shill for those corporate interests is apparent in a craven new policy statement from the Education Department. The document claims that the federal government can pre-empt state laws that rein in student loan servicing companies if such a law “undermines uniform administration of’’ the student loan program.
This legally baseless policy statement could easily have been written by the servicers, who will no doubt use it as a smoke screen when they are sued by states for using deceptive practices. The statement clearly is intended to intimidate state legislatures across the country that are considering proposals to curb well-documented abuses by this industry. Curbs are already being applied in California, Connecticut, Illinois and the District of Columbia, where loan servicers are required to have state licenses and submit to state regulation.
The servicers are working on the legislative front, too, pushing a particularly destructive House bill that would pre-empt the right of the states to oversee companies that originate, service or collect student loans — essentially neutralizing reforms that are underway across the country.
The loan servicing industry’s longstanding failures came into sharp focus three years ago when an analysis of consumer complaints by the federal Consumer Financial Protection Bureau found that some companies were pushing struggling borrowers toward default — which essentially ruins their financial lives — by giving them misinformation, by making it difficult for them to refinance their loans and pay lower rates, and by withholding information about affordable payment plans.
Among other things, borrowers reported that servicers sometimes applied a larger portion of a borrower’s monthly payment to a lower-interest loan, so as to leave a higher-interest loan with a larger balance. By keeping the borrower in debt longer, the companies could make more money. Beyond that, student rights advocates argued plausibly that the servicers’ business model relied on getting borrowers off the phone as quickly as possible, leading customer service employees to suggest payment options that could be explained quickly but that were sometimes not in the borrower’s interest.
These findings showed that the servicers were aggravating the student debt crisis, unfairly driving up debts that could dog student borrowers into their retirement years, when they are least able to make good on their debts.
Last year, the Consumer Financial Protection Bureau and the attorneys general of Illinois and Washington State filed lawsuits against Navient, the country’s largest student loan servicer, which handles roughly one in four student borrowers. The federal lawsuit contended that the company had failed borrowers at every step of the repayment process and was particularly remiss when it came to enrolling distressed borrowers in income-based repayment plans, under which monthly payments can fall to zero.
The Massachusetts attorney general has sued another loan servicer, the Pennsylvania Higher Education Assistance Agency, charging that it mismanaged a program under which students were entitled to have their loans forgiven after 10 years in public service occupations like nursing, social work, policing and the military. Earlier this month, a state court in Massachusetts ruled that the case could go forward, despite the Trump Justice Department’s claim that the federal Higher Education Act pre-empted the state’s right to sue the servicer, which is under contract to the federal government.
What’s striking is that the Education Department released the pre-emption statement even after leading regulatory experts had condemned the idea as harmful and legally unsustainable. Earlier this month, the Conference of State Bank Supervisors, which represents regulators in all 50 states, shredded the legal arguments behind the pre-emption idea, pointing out that education officials were not empowered to strip the states of their traditional — and primary — authority over debt collection and other aspects of the financial services industry.
Beyond that, a bipartisan group of 25 state attorneys general warned in a strongly worded letter last fall that the department could not legally abridge powers that the states have long had to protect citizens from fraudulent business practices. Last week, an even larger group of attorneys general warned against the pre-emption bill pending in the House, which they said would block the states from combating fraud and abuse in the student loan industry. At a time when student loan debt has soared to nearly $1.4 trillion, the attorneys general said, the federal government should be working hand in hand with its state partners — instead of trying to sideline them.
The pre-emption statement shows the extent to which the Education Department has been captured by an industry it is meant to regulate. Fortunately, state regulators have made clear that they will continue to prosecute servicers that violate state law — and will challenge the federal government in court if it tries to interfere. Meanwhile, the dangerous pre-emption legislation pending in Congress deserves to die a swift death.
