NEW YORK–Student lending companies across the country have been trying to derail state investigations of allegedly abusive practices by asking the Department of Education to issue formal guidance saying federal law preempts state probes, according to a claim being made by a bipartisan group of 25 attorneys general.
Attorneys general in Texas, New York, Kansas and California and other states have sent a letter urging Education Secretary Betsy DeVos to reject the requests by at least two national industry groups, arguing that their probes have been effective in returning tens of millions of dollars to borrowers, Bloomberg is reporting.
“These requests defy the well-established role of states in protecting their residents from fraudulent and abusive practices,” the states said in the letter. “The department cannot sweep away state laws that apply to student loan servicers and debt collectors.”
According to Bloomberg, the dispute may highlight the Trump administration’s strategy for dealing with the “vast ecosystem that feeds on federal student loans,” including debt servicers, refinance lenders and debt collection agencies. As the debt balloons, so does the opportunity for abuse, Bloomberg noted.
As of June 30, more than seven-million former students were in default on a record $144 billion of federal loans among borrowers trying to repay more than $1.3 trillion in government-backed education debt. Last year, 1.1 million borrowers defaulted on loans made directly by the Education Department.
Bloomberg noted that states have had some success in recent years investigating wrongdoing in higher education, including winning $103 million in loan forgiveness as part of a Justice Department settlement with Education Management Corp. over the school’s allegedly misleading statements to students. DeVry University issued $100 million in refunds and debt forgiveness following a similar probe by a coalition of states and the Federal Trade Commission.
“We cannot allow student-loan servicers to sidestep state law and oversight and deny students and borrowers these vital protections from student-loan abuses,” New York Attorney General Eric Schneiderman said in a statement.
According to Bloomberg, the Education Department received letters from groups, including the National Council of Higher Education Resources, saying that while they support high-quality loan servicing for borrowers, state probes needlessly replicate efforts by the federal government, including the Consumer Financial Protection Bureau.
But the Education Department in August told the CFPB it would stop sharing information with the agency, and the FTC historically hasn’t pursued student loan servicers, Bloomberg said. If states are taken out of the equation, that could leave DeVos to police the nation’s second biggest consumer debt market, after home mortgages. DeVos’ department spends about $1.5 billion annually on contracts with companies to collect student loan debt, Bloomberg said.