In the past several months, news has cycled from one student loan lawsuit to another. State attorneys general have filed suits against servicers, and there are even individual and class action lawsuits from consumers.
This past week, the Pennsylvania Higher Education Assistance Agency (PHEAA) filed a lawsuit against the Connecticut Banking Department. As part of this student loan lawsuit, PHEAA wants the court to declare that federal rules regulating student loan servicers supersede the more stringent regulations Connecticut is trying to enforce.
The effects of the ruling on this case might not be limited to Connecticut. It could set a precedent that influences the ability of individual states to set their own regulations and protect consumers.
Why is PHEAA filing a student loan lawsuit against Connecticut?
Connecticut, along with several other states, requires student loan servicers to get a license to collect payments from borrowers who live in the state.
However, PHEAA is balking at some of the paperwork Connecticut requires to obtain the proper licensing. The student loan servicer claims that turning over some of the information would violate federal privacy law. Some of that information, reported MarketWatch, includes data on the complaints consumers made about the servicer to the federal government.
With Connecticut threatening to revoke PHEAA’s license, the servicer is hoping to get clarification on the law through the courts.
“As a federal loan servicer, PHEAA seeks direction when conflicting regulatory guidance is issued by different federal and state regulators,” said PHEAA in a statement sent to the Washington Post.
Where does the Department of Education stand on this issue?
In March, the Department of Education issued its own guidance regarding state regulation of student loan borrowers.
“State regulation of the servicing of Direct Loans impedes uniquely federal interests,” said the filing. The filing also went on to insist that state regulations can make it difficult to uniformly administer the federal student loan program.
When PHEAA asked the Department of Education to release the requested data to Connecticut, the department rejected the petition, according to the Washington Post. Now, the Department of Education is suggesting that PHEAA ask the Connecticut Banking Department to submit a direct request for the documentation.
However, it isn’t clear whether the Department of Education would honor that request. The department’s own guidance is that federal rules supersede state regulation. Even Betsy DeVos has expressed her belief that state student loan laws shouldn’t be more restrictive than federal regulations.
It’s important to understand that the department’s recent notice isn’t legally binding, said Adam Minsky, a student loan lawyer.
“Right now, it’s just the department’s position that states shouldn’t be aggressively protecting consumers,” Minsky said. “They’ve made that clear. But a court case could change the nonbinding nature of the department’s guidance.”
How could this student loan lawsuit impact borrowers in the future?
Depending on how the case is decided, the effects could go beyond the state of Connecticut.
“The ruling in this case has the potential to affect how other states regulate student loan servicers,” said Minsky. “It would set a precedent that tells servicers that they don’t have to abide by state student loan laws.”
Minsky thinks that this could be problematic going forward because the Department of Education has been rolling back consumer protections since the beginning of President Donald Trump’s administration.
“The Department of Education is quite clearly and publicly siding with loan servicers over consumers,” said Minsky. “If the court rules against Connecticut, that would hinder the ability of states to regulate the private companies operating in their borders.”
Not only that, but it would also make it harder to hold servicers accountable for bad behavior.
“If states aren’t allowed to crack down, there would be little incentive for servicers to improve their offerings,” he said. “As the current administration continues to erode consumer protection, states have been the last line of defense. It would really put borrowers at a disadvantage.”
What can you do?
Without something in law, this question could be left up to the courts to decide. If you want to protect yourself, consider contacting your representatives in Congress and in your state legislature. By showing your support for strong consumer protections, it’s possible for you to put pressure on lawmakers to move forward and clarify this issue.
Currently, legislation that includes a student loan bill of rights is through the Senate. However, it still needs to pass the House and make it to the president’s desk before it becomes law.
In the meantime, contact your student loan servicer. If making payments is difficult, find out if you’re eligible for income-driven repayment plans. You can also look into student loan deferment and forbearance programs. That way, you can better manage your payments.
You can also consider refinancing your private loans to reduce your interest rate and payments, making your loans more manageable.
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