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Feds tell state officials to back off student loan debt collectors

Education Secretary Betsy DeVos.
Joe Raedle/Getty Images
Education Secretary Betsy DeVos.

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Education Secretary Betsy DeVos has a message for Massachusetts Attorney General Maura Healey and officials in other states hoping to rein in student loan debt collectors: Back off.

The US Department of Education announced Friday that it considers state efforts to regulate collection companies — many of which have been accused of unfair consumer practices — inappropriate and that they “undermine” federal authority.

The notice from the Education Department and DeVos infuriated consumer advocates and Healey, who called it a move to protect debt collectors at the expense of student loan borrowers across the country.

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“Secretary DeVos can write as many love letters to the loan servicing industry as she wants,” Healey said in a statement. “The last thing we need is to give this industry a free pass while millions of students cannot afford to pay their loans.”

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Under DeVos’s watch, the Education Department has, in the past year, tried to unravel many of the policies and practices put in place by the Obama administration on everything from campus sexual assault to for-profit schools. DeVos has argued that many of the rules went too far or were too hastily conceived.

Mass. AG Maura Healey sues Betsy DeVos, againAs recently as 2016, the Education Department had told states that their regulation of student loan debt collectors would not conflict with federal law.

“There’s a pattern here of knee-jerk reversals,” said Suzanne Martindale, senior attorney for Consumers Union, an arm of Consumer Reports.

In Friday’s notice, the federal education agency singled out Healey’s ongoing lawsuit against the Pennsylvania Higher Education Assistance Agency as a particularly egregious example of state officials overstepping their authority. The federal government has stepped in on behalf of the debt servicer in the state case.

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Healey has alleged that the servicer, which does business as FedLoan Servicing, violated state and federal laws by causing teachers and others to lose benefits and financial help under the Public Service Loan Forgiveness program. Under the program, students can have loans forgiven after 10 years of public service, a benefit designed to encourage graduates to take jobs in government and nonprofits. But processing delays by FedLoan Servicing and errors in its billing systems caused thousands of borrowers to be overcharged and extended their loan periods, costing consumers more money, the state lawsuit alleges.

FedLoan Servicing disputes the allegations.Maura Healey, other AGs sue DeVos over student loan rules

Legislators in other states have also adopted new laws requiring student loan collection companies to get state licenses, meet certain business standards, and comply with investigations launched by local authorities.

These new state requirements “may conflict with legal, regulatory, and contractual requirements, and may skew the balance the department has sought in calibrating its enforcement decisions to the objectives of the program,” the Department of Education said in its notice.

They may also cost taxpayers more money by piling regulations onto these companies, who are likely to pass on the cost to the Education Department, DeVos said in the notice filed on Friday.

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The Department of Education hires companies such as FedLoan Servicing and Navient to collect payments on more than $1 trillion of the $1.4 trillion in outstanding student loan debt owed by Americans.

Trade groups representing these companies said the Education Department was right to step in and assert its authority.

“Clear, uniform student loan servicing guidance from the federal government will help borrowers avoid the frustrations of an inconsistent patchwork of policies from individual states,” the Student Loan Servicing Alliance said in a statement. “It is critical that we set aside political . . . rhetoric and focus on creating effective solutions for the biggest issues facing borrowers, like simplifying complex repayment programs and improving college completion rates.”

Alan Collinge: Trump is pushing the student loan system to the brink of failureYet borrowers have for years complained about these companies, and federal and state investigations have found problems in their collection practices and the Education Department’s oversight.

For example, an investigation by states and the Consumer Financial Protection Bureau alleged that Navient, a major student loan collection company, encouraged struggling consumers into a short-term loan forbearance program that required less paperwork for the company but meant that borrowers who postponed payments accrued more interest on their debt. Many borrowers could have instead qualified for repayment options based on their incomes and how much they could afford, which would have lowered their monthly bill and put them on a potential path for loan forgiveness.

Authorities said Navient offered its employees incentives to get borrowers into forbearance plans, a move that allowed the company to collect $4 billion in interest charges over five years. Navient has denied any wrongdoing and said that 53 percent of the loan balances it services for the federal government are in income-driven repayment plans. Still, several states have sued the company.

Mass. AG Healey can pursue student loan debt lawsuit, judge rulesThe Department of Education, which contracts with these companies, hasn’t always been the best enforcer of consumer laws, said Persis Yu, a staff attorney at the National Consumer Law Center, a Boston-based organization that operates a borrower assistance project.

Errors and delays by these collections companies have extended borrower loan periods by years and cost them thousands of dollars, Yu said.

“Having more cops on the beat to look out for student loan borrowers [is] better,” she said.

Healey said her office plans to continue its investigations into student loan collection companies, but consumer groups worry that other state authorities may be discouraged by the Education Department’s warning. Some states may abandon stronger consumer protection efforts as a result, they said.

Ultimately, legal experts said the courts will likely have to determine who has authority to regulate the industry.

Deirdre Fernandes can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe.