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A battle brewing between states, student loan companies and Betsy DeVos’s Department of Education looks like it will come to a head in a courtroom in the coming months.
The Pennsylvania Higher Education Assistance Agency, or PHEAA, one of the large firms that manages federal student loans on behalf of the Department of Education, sued Connecticut’s department of banking, it’s banking commissioner and the federal Department of Education on Thursday over the state’s student loan laws.
As part of the suit, PHEAA is asking the court to declare that the federal government’s rules supersede Connecticut’s efforts to regulate the student loan industry — including a demand from the state that PHEAA provide certain documents or risk losing its ability to operate in Connecticut.
The suit comes amid an ongoing clash between states, the Department of Education and student loan companies over whether states have the authority to regulate these firms.
More states require student loan servicers to obtain a license
Over the past few years, states, beginning with Connecticut, started passing laws requiring student loan servicers to obtain a license and live up to certain consumer protections to operate within their borders. Borrower advocates have complained for years that these companies don’t do enough to work in borrowers’ best interests, despite their relationship with the federal government.
Last year, student loan companies told federal officials that these state laws should be preempted — or essentially superseded — by federal laws and the contracts they have with the federal government. Last month, Betsy DeVos issued a memo agreeing with that point of view. In the weeks since, state officials, including some Republicans, have vowed to protect their state laws in the face of challenge.
Unless Congress acts, the courts will decide the issue
Previously, the Department of Education under the Obama administration, took essentially the opposite approach to these questions. In 2016, Department officials provided guidance to the state of Maryland indicating the agency believed that laws the state was considering at the time to regulate student loan servicers isn’t preempted by federal law and wouldn’t conflict with the federal government’s contracts.
“This is a very deliberate battle going on,” David Rubenstein, a professor at Washburn University School of Law and an expert on preemption, said of the suit. “Unless Congress acts, this is going to have to be resolved by the courts.”
In the suit, PHEAA, which has been licensed by the state of Connecticut since June 2017 and services about 100,000 loans in the state, claims that Connecticut officials asked the company to produce certain documents, including data on complaints about the servicer made to the federal government and other entities, in order to keep its license.
PHEAA claims that the Department of Education prohibited the company from providing those records, which the suit says includes personal identifying information of student loan borrowers, to the state. Now, the suit claims, PHEAA is at risk of violating federal laws if accedes to the state’s demands or losing its ability to operate in the state if it doesn’t.
Regardless of the legal arguments made in the case, David Bergeron, a senior fellow at the Center for American Progress, a left-leaning think tank and a more than 30-year veteran of the Department of Education, said he’s “troubled” by the notion that the federal government would try to stop a student loan company in its purview from sharing data regarding complaints with other regulators.
“Everyone — whether it’s the state of Connecticut, or PHEAA or the Department of Education — should have a common goal and that is to provide high quality service to borrowers,” he said. “What we know from experience is that in sharing that information we improve oversight.”
Meanwhile, Connecticut officials, including the state’s attorney general are reviewing the suit, Matt Smith, a Connecticut Department of Banking spokesman said in a statement.
“The Department of Banking takes its responsibility for ensuring strong consumer protections for borrowers extremely seriously,” Smith’s statement reads. “As Secretary DeVos and the Trump Administration try to undermine our ability to do so, we remain steadfastly committed to upholding this practice.”
Connecticut state officials believe they should regulate student loan servicers
But state officials believe they have the right to regulate student loan servicers operating in their state.
Matthew Lesser, a state representative who shepherded Connecticut’s law regulating student loan servicers to passage, went a step further, accusing the Department of Education of colluding with the student loan industry to fight these state laws. The Department declined to comment on pending litigation.
“This is just their attempt to get out of having to face any meaningful regulation in any aspect of their business anywhere,” Lesser said of student loan servicers. “Connecticut is going to vigorously enforce our laws.”
Rubenstein, the preemption expert, said it’s hard to say how the case will play out, but it does raise interesting legal questions such as whether terms of a federal contract can preempt state laws.
In the case, PHEAA argues that its contract with the federal government conflicts with state requirements and that the contract requirements supersede the state laws. Rubenstein said it’s still an open question in the case law as to whether a federal contract can preempt state laws and how the court answers that question will be important to watch in this case.
“Because of the rise of privatization in government, this becomes a much more important legal question to be fleshed out,” he said.
One of PHEAA’s stronger arguments in the case is that a federal statute expressly preempts state law when it comes to disclosure, but the court case cited in the complaint surrounds a different meaning of disclosure than the one at issue in the PHEAA case. There’s an argument to be made as to whether Congress intended both meanings of disclosure in the statute or not, he said.
Christopher Peterson, a professor at the University of Utah’s S.J. Quinney College of Law, said in an email that he isn’t buying PHEAA’s argument that Congress prohibited states from regulating student loan companies in this way. “States’ rights should not be thrown out the window whenever a state happens to provide consumer protections from financial companies for families that are struggling to make ends meet.”
Still, Rubenstein believes this isn’t so clear-cut. “I don’t see any easy winners here,” he said. “I’m not convinced that any side is really right.”