States Take on Student Debt Abuses as the Trump Administration Defaults

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Chris Radburn/Press Association via AP Images

Student loan-servicing companies are an underappreciated part of a debt-for-diploma system that has badly failed college students and graduates. The loans themselves are a mix of direct federal loans, state loans, and private ones guaranteed by the government, but virtually all payments are collected by loan servicers. These companies, as for-profit middlemen, can pile on unnecessary costs to indebted students and steer them to act against their own self-interest.

The Obama administration sought to rein in abuses, issuing policy guidelines for loan servicers and allowing relief for students who were misled by for-profit colleges—but stopped short of formally regulating the loan-servicing industry. Earlier this year, the largest of the nine loan-servicing companies, Navient Corp, formerly part of lender Sallie Mae, became the target of lawsuits from consumers, state attorneys general, and the Consumer Financial Protection Bureau (CFPB). With the Trump administration now rescinding the weak federal protection that exists, the initiative now passes to the states, more than a dozen of which have proposed legislation to protect the 44 million Americans who owe more than $1.3 billion in student debt.

Instead of encouraging income-based repayment plans, according to the lawsuits, Navient drove many debtors to hold off on making payments temporarily while interest on their loans continued to accrue, raising costs and increasing their risk of defaulting. The CFPB alleges that from January 2010 to March 2015, Navient added as much as $4 billion in mostly avoidable interest charges to the balances of student borrowers. Those hoping for some relief often found that their complaints were ignored by the company, which receives thousands such complaints every year.

“For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans,” said CFPB Director Richard Cordray. “At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs.”

Navient categorically denied all charges and promised to “vigorously pursue this matter in court.” Despite publicly claiming that helping customers successfully manage their loans takes top priority, in a March motion filed in federal court Navient admitted that “there is no expectation that the servicer will act in the interest of the consumer.”

This month, National Collegiate Student Loan Trusts, another major player in the industry, reached a settlement of at least $21.6 million with the CFPB. The company and its debt collector Transworld Systems wrongfully sued more than 2,000 borrowers over debts which had expired or for which ownership couldn't be proven, according to the CFPB. National Collegiate will pay at least $3.5 million in restitution to consumers who made payments after being sued.

“People don't realize how much of a ‘wild, wild west' it is in the student loan market,” says Maggie Thompson, the executive director of Generation Progress, the youth engagement wing of the Center for American Progress. “There are basic protections in other lending industries that student borrowers just don't have.”

UNLIKE MORTGAGE LENDERS and other issuers of credit, student loan servicing companies have remained largely unregulated. Only in its final months did the Obama administration make efforts to increase consumer protections, issuing policy memos but not binding regulations.

Among other things, the Obama memos would have created financial incentives for student loan servicers to better communicate with borrowers close to default and penalized companies that failed to provide high-quality service. The memos also would have simplified the repayment process, requiring the creation of a one-stop shop for making payments on loans and all of a borrower's account information, regardless of which servicer was handling their loans. But the Obama memos didn't last long, having since been rescinded by Education Secretary Betsy DeVos. The Education Department has indicated that a company's past performance will no longer be a factor when awarding a contract to service student loans. The relatively new CFPB has been the main federal player seeking to protect the rights of debtors, and if the Trump administration has its way, the CFPB will be sidelined.

“The federal government has been inactive in addressing this issue” says Matt Lesser, a Democratic state senator from Connecticut who introduced the first state student loan bill of rights in the country. “They've sat on the sidelines as the debt tsunami has risen higher and higher.”

State bill-of-rights laws for debtors require student loan-servicing companies to register with the state to receive a license, and in most cases use licensing fees to create an ombudsman position to respond to borrower needs and complaints. The laws establish minimum standards of service and require companies to regularly report student loan data, so that regulators can more easily detect servicing issues. Companies that fail to live up to such standards could have their license to operate in the state revoked or suspended. The idea is to ensure that student loan borrowers receive levels of protection and service that are required in other financial contracts, but are not currently guaranteed by federal law. Lesser admits that when first drafting the Connecticut bill, he simply copied and pasted sections from mortgage industry regulation codified after the financial crash.

So far, two states—Connecticut and California—and the District of Columbia have passed a student loan bill of rights, and lawmakers in eight other states are currently considering similar legislation.

The Connecticut bill, passed in 2015, which became the blueprint for other state proposals, was short in company until Donald Trump was elected president. 12 of the 14 states that introduced bills regulating loan servicers did so after Trump announced that he had chosen DeVos as his nominee for education secretary. Five of the 14 states introduced such legislation after DeVos's nomination passed the senate committee.

“Frankly, the actions of the DeVos administration have made state action even more urgent,” says Democratic State Senator Eric Lesser (no relation to Matt Lesser), who introduced a student loan bill of rights currently being considered in Massachusetts.

Industry lobbyists have been deployed in such states as Maine, Washington, Maryland, and New York. In the case of Maine, a student loan bill of rights made it to the Senate floor before lobbyists hired by Navient interceded. The bill was sent back to committee on a party-line vote.

“These are very big, powerful companies with a lot of money at their disposal. We expect there to be resistance,” says Eric Lesser.

“Part of the reason the system got as broken as it is is that these powerful forces have worked to carve out loopholes and weaker regulation for themselves.”

In June, the Education Finance Council, a trade group representing nonprofit and state-based student loan servicers, sent a letter to DeVos, requesting that the agency “publicly state” that existing federal regulation of student loan servicers preempts state law. The month after, the National Council of Higher Education, the main trade association for student loan servicing companies, sent a similar letter to the education department, claiming such laws “add unnecessary complexity to the federal student loan system”.

Should the Education Department issue guidance clearly stating that state rules are conflict with federal requirements, all state-level protections would be pre-empted, though the action might be challenged in court. This would be a significant turnabout for the department, which has signalled in the past that it would not preempt state rules. A spokesperson for the department did not respond to the Prospect’s request for comment.

DeVos's short and already tumultuous time at the helm of the Education Department has left state legislators and consumer advocates worried. Despite making states' rights her mantra during her confirmation hearings and thereafter, even defending schools that discriminate, DeVos's propensity to favor business interests evidently trumps her support for federalism.

In April, one week after receiving a letter from one of the industry's main lobbies, DeVos announced that she would be rescinding basic protections established in the Obama memos in 2016. She argued that costs needed to be curbed and that the Obama's administration's plan would be unnecessarily expensive (student loan servicing companies are paid hundred of millions of dollars by the federal government for their work). At a time when more than a million borrowers are defaulting annually, critics warned the move would only increase the likelihood of more defaults.

On August 31, the education department wrote a letter to the CFPB, giving a 30-day notice that it planned to terminate two information sharing agreements with the agency. The letter described the CFPB as “overreaching” and “unaccountable.” According to McCann, the soon-to-be-terminated agreements were in part meant to streamline processes for companies dealing with both agencies, allowing them to exchange information about borrowers and loan servicing companies. “This complicates any future oversight, at a minimum,” says McCann. “It makes things burdensome for the CFPB and loan servicers themselves. … If I had to guess, I’d say that [student loan] servicers are quietly rejoicing about this decision.”

Navient stock, which had already risen sharply after the election of Donald Trump, got a boost after the letter's release.

The termination of the agreements is unlikely to have an effect on the CFPB's handling of private loans, but casts a cloud of uncertainty over those with federal loans. Prior to February 2016, when the CFPB began to accept complaints about federal loan servicing, borrowers did not have much recourse. The education department is responsible for enforcing the Higher Education Act, while the CFPB is tasked with enforcing more extensive consumer protections. According to the CFPB, nearly 20,000 complaints had been handled by the time DeVos decided to cut off the agreements between the two agencies. At the time of writing, the CFPB website still seems to be taking complaints regarding federal loans.

“We're in uncharted territory as to what's going to happen when the agencies no longer have information sharing capacity,” says Whitney Barkley-Denney, the legislative policy counsel at the Center for Responsible Lending. “Even the CFPB is in dark about what things will look like.”

A spokesperson for the CFPB did not respond to the Prospect’s request for comment on how the education department's decision might affect enforcement efforts.

With so much still up in the air, legislators like Eric Lesser say that they are hurrying to pass what protections they can. Consumer advocates and lawmakers maintain that state-level regulation is no substitute for stiffer federal oversight. But for the time being, it might be the best they can get.

“In a perfect world, these state regulations would be part of multiple layers of protection,” says Barkley-Denney. “In our world, it's a good first step.”