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Government scrutiny of state student loan regulations are unlikely to help borrowers, experts say

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Gov. Andrew Cuomo said federal deregulation would protect for-profit lenders.

The United States Department of Education, in a statement, recently said state consumer protection laws do not apply to student loan servicers under federal contract, meaning only the federal government has the authority to regulate student loans provided by those companies.

In response, New York state Gov. Andrew Cuomo said in a press release that with student debt mounting nationwide, this move by the federal government is meant to protect for-profit lenders from extra scrutiny from states.

“Rather than try to address tuition costs, or open access for students, the White House and the Congressional majority are intent on protecting student loan companies and debt consultants,” the release said.

The DOE statement is known as a notice of interpretation, said student loan expert Mark Kantrowitz, and is unlikely to make a tangible difference in policy until it’s brought up in court.

Kantrowitz said that if it does go to court, the DOE has a strong argument for deregulation, given that contracts with student loan servicers are under federal jurisdiction. States had little justification in adding regulations on those servicers, he said.


“It would be potentially complicated for these contractors to comply with 50 different state laws, each of whom might have different requirements or even conflicting requirements,” said Kantrowitz, who’s the publisher of PrivateStudentLoans.guru.

James Bergeron, president of the National Council of Higher Education Resources, said in an email that licensing processes and other regulations would bog down the ability of smaller student loan servicers to serve borrowers.

“We’ve worked with numerous states to pass legislation … exempting small state and nonprofit servicers from new state student loan servicing licensing laws where the cost of licensure and regulatory compliance in multiple states could be prohibitive for these state organizations,” Bergeron said.

The notice of interpretation came at a time when faith in the federal government’s willingness to regulate student loan servicers on behalf of borrowers was already low, said Benjamin Barrett, policy analyst for New America, a non-partisan, nonprofit organization focused on public policy.

Barrett added that last year, the DOE repealed the Student Aid Borrowers Bill of Rights and the Mitchell memo, which were documents that outlined basic tenets of how to properly apply for, use and distribute student loans for both borrowers and servicers. Both documents were drafted during former President Barack Obama’s administration.

“To a lot of people, that was shocking,” Barrett said. “It (could have) signaled, initially, without any context, that they were not interested in holding these companies accountable.”

Barrett added that, during the Obama administration, Maryland wanted to follow other states in adding regulations on student loan servicers, but before doing so, the state sent a letter to the federal DOE asking if it was permissible. The department said yes, in response.

New York State Assemblyman Kenneth Zebrowski said in an email that he, along with state legislators from 14 other states, have been making an effort to increase regulations on student loan servicers, and added that he sponsored a bill that would “establish a baseline of consumer protections.”

“As a New York State Legislator, it is my job to protect New York students,” Zebrowski said. “We are best positioned to respond to the needs of our constituents.”

Kantrowitz said any court cases that will happen as a result of the department’s notice of interpretation are likely to be riddled with compromise, with neither side prevailing completely.

“It’ll be like the compromise in which nobody’s really happy, but sometimes the best compromises are won when not every side is completely satisfied with what it got,” he said. “When government gets involved, it often gets complicated.”

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