The U.S. Department of Education has told state governments looking to crackdown on unethical practices by some financial companies looking to recoup students’ loans that some of their tactics were unfair and potentially undermine federal authority.
The notice came from Education Secretary Betsy DeVos. In it she wrote that some new state requirements “may conflict with legal, regulatory, and contractual requirements, and may skew the balance the department has sought in calibrating its enforcement decisions to the objectives of the program,” she said.
Several states have passed regulations requiring student loan collection firms to be licensed, meet certain standards and cooperate with investigations launched by state and local authorities into their practices.
Those efforts at regulation stem from complaints by borrowers, as well as state authorities, that some companies use unethical means to push students into products that extend the lives of the loans and ultimately increase the loan amounts.
One agency, the Pennsylvania Higher Education Assistance Agency is accused of causing teachers, as well as others, to lose financial benefits from the Public Service Loan Forgiveness program.
The Public Service Loan Forgiveness Program allows loans to be forgiven if students work for ten years in a qualifying area of employment, such as for the government or a non-profit organization. It is meant to encourage work in public-service industries by young adults.
The firm, which does business as FedLoan Servicing, is accused of delaying processing and making errors in its billing systems that caused thousands of borrowers to be overcharged and extended their loan periods.
The company is being sued by Massachusetts Attorney General Maura Healey. The Department of Education, in January, inserted itself into the lawsuit on the side of FedLoan, arguing that federal law superseded state law claims made by Healey, something the Massachusetts AG harshly criticized.
“We sued to hold the company accountable for cheating students and families under Massachusetts law and the Department of Education has no business in this case,” Healey said in a statement. FedLoan Servicing denies any wrongdoing.
The Department of Education hires companies like FedLoan to help it collect outstanding debts from student borrowers. There is currently $1.4 trillion in student loans outstanding in the U.S.
Trade groups representing student loan collectors applauded DeVos’ statement.
“Clear, uniform student loan servicing guidance from the federal government will help borrowers avoid the frustrations of an inconsistent patchwork of policies from individual states,” the Student Loan Servicing Alliance said in a statement. “It is critical that we set aside political…rhetoric and focus on creating effective solutions for the biggest issues facing borrowers, like simplifying complex repayment programs and improving college completion rates.”
Healey however said her office plans to continue her investigations into the practices of some of these firms, as well as her lawsuits. She sued the Department of Education last year, for example, alleging the Department delayed rules that protected student loan borrowers. Eighteen other state attorneys general have joined her in the lawsuit.
“Since day one, Secretary DeVos has sided with for-profit school executives against students and families drowning in unaffordable student loans. Her decision to cancel vital protections for students and taxpayers is a betrayal of her office’s responsibility and a violation of federal law,” Healey said at the time.