DeVos to Assert that Only Department of ED, Not States, Can Regulate Student Loan Servicers

POLITICO has reported that Education Secretary Betsy DeVos plans to take actions that would prevent state regulators from exercising authority over student loan servicers. According to POLITICO, which obtained a draft of the “notice of interpretation,” DeVos argues that only the federal government, not the states, has the authority to oversee federal student loan servicers. 

Last year DeVos also told the Consumer Financial Protection Bureau that the Department of Education (ED) would be terminating the Memoranda of Understanding (MOUs) between ED and the CFPB regarding the sharing of information in connection with oversight of federal student loans.  The notice to the CFPB was authored by Kathleen Smith, acting assistant secretary for postsecondary education and Dr. A. Wayne Johnson, Chief Operating Officer, Federal Student Aid. The letter said,

“Our goals are to ease the burden for borrowers and to enhance the efficiencies of our servicers -- not to complicate the federal student loan process with potentially inaccurate and inconsistent directives. The department entered into the [memorandums of understanding] in reliance on the CFPB's commitment to helping each agency fulfill its respective duties. Instead, the CFPB is using the department's data to expand its jurisdiction into areas that Congress never envisioned. This latest expansion is characteristic of an overreaching and unaccountable agency, and it has led the Department to terminate the MOUs in order to ensure a fair and consistent enforcement of Title IV requirements and the efficient resolution of borrower complaints. The Department takes exception to the CFPB unilaterally expanding its oversight role to include the contracted federal loan servicers.” 

Perhaps in this context, a similar effort to restrict states' involvement in overseeing servicers is no surprise.

According to POLITICO, last year 25 Democratic and a handful of Republican state attorneys general sent a letter to DeVos, urging that she “reject an ongoing campaign by student loan servicers and debt collectors to secure immunity for themselves from state-level oversight and enforcement. ...The Education Department 'cannot sweep away state laws that apply to student loan servicers and debt collectors.'" 

Nine companies currently provide student loan servicing for Department of Education loans, with Navient, NelNet, Great Lakes Educational Loan Services, and FedLoan Servicing handling the primary load. Currently, there is no common database, and each firm uses a different system. So a borrower with multiple loans may be required to interface with multiple companies using a variety of processes -- a system ripe for errors or -- at a minimum -- frustration. 

Last summer Secretary DeVos announced her intent to transform how the Federal Student Aid Fund (FSA) provides customer service to more than 42 million student loan borrowers. That announcement described an ambitious “Next Generation Processing and Servicing” plan. Dr. A. Wayne Johnson, then Chief Operating Officer of FSA commented at the time: 

“The FSA Student Loan Program represents the equivalent of being the largest special purpose consumer bank in the world. To improve customer service, we will take the best ideas and capabilities available and put them to work for Americans with student loans. When FSA customers transition to the new processing and servicing environment in 2019, they will find a customer support system that is as capable as any in the private sector. The result will be a significantly better experience for students – our customers – and meaningful benefits for the American taxpayer.”

In December 2017 Johnson issued a request for information related to the Next Gen system. Last month, in January 2018, DeVos created a new unit in the Department called the Office of Strategy and Transformation, with Johnson in charge. And earlier this month, the Department officially issued a Phase 1 Solicitation for nine components plus quality assurance of the Next Generation Financial Services Environment. 

The full Solicitation document can be downloaded here. At the moment, it does not address the activities of private collection agencies and the collection of loans in default, however that slice of the pie IS represented in the big picture system diagram. It may be a few years before a servicing system is launched and ED is able to address the later stage activity; at the moment, it is unclear how this will affect debt collection contractors.