The U.S. student loan industry is trying to derail state investigations of allegedly abusive practices by asking the Department of Education to issue formal guidance saying federal law preempts state probes, a bipartisan group of 25 attorneys general claim.
States including Texas, New York, Kansas and California on Tuesday sent a letter urging Education Secretary Betsy DeVos to reject the requests by at least two national industry groups, arguing that their probes have been effective in returning tens of millions of dollars to borrowers.
“These requests defy the well-established role of states in protecting their residents from fraudulent and abusive practices,” the states said in the letter. “The department cannot sweep away state laws that apply to student loan servicers and debt collectors.”
The dispute may highlight the Trump administration’s strategy for dealing with the vast ecosystem that feeds on federal student loans, including debt servicers, refinance lenders and debt collection agencies. As the debt balloons, so does the opportunity for abuse.
As of June 30, more than 7 million former students were in default on a record $144 billion of federal loans among borrowers trying to repay more than $1.3 trillion in government-backed education debt. Last year, 1.1 million borrowers defaulted on loans made directly by the Education Department.
States have had some success in recent years investigating wrongdoing in higher education, including winning $103 million in loan forgiveness as part of a Justice Department settlement with Education Management Corp. over the school’s allegedly misleading statements to students. DeVry University issued $100 million in refunds and debt forgiveness following a similar probe by a coalition of states and the Federal Trade Commission.
“We cannot allow student-loan servicers to sidestep state law and oversight and deny students and borrowers these vital protections from student-loan abuses,” New York Attorney General Eric Schneiderman said in a statement.
