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Financial Services Law Insights and Observations

Education Dept. rolls back state-law preemption on student loans

Federal Issues Department of Education Student Lending Preemption Federal Register Student Loan Servicer

Federal Issues

On August 9, the U.S. Department of Education published an interpretation, noting “that there is significant space for State laws and regulations relating to student loan servicing, to the extent that these laws and regulations are not preempted by the Higher Education Act of 1965, as amended (HEA), and other applicable Federal laws.” The interpretation clarifies the Department’s position on the legality of state laws and regulations regarding certain aspects of federal student loan servicing, such as preventing unfair or deceptive practices, correcting misapplied payments, or addressing refusals to communicate with borrowers. According to the interpretation, though federal law preempts state laws that conflict squarely on issues such as timelines, dispute resolution procedures, and collections, the Department believes that it does not preempt state laws regarding affirmative misrepresentations or other measures meant to address improper conduct that could occur in Federal Family Education Loan Program. The Department stated that “[s]tates may consider and adopt additional measures which protect borrowers and do not conflict with Federal law,” and that “such measures can be enforced by the States and the Department can and will work with State officials to root out all forms of fraud, falsehood, and improper conduct that may occur in the Federal student aid programs.” According to the Department, “[t]his action will help states enforce borrower bills of rights or other similar laws to address issues with servicing of federal student loans.” The new interpretation revokes and supersedes the interpretation published in March 2018, “Federal Preemption and State Regulation of the Department of Education’s Federal Student Loan Programs and Federal Student Loan Servicers” (covered by InfoBytes here). Comments are due 30 days after publication in the Federal Register.

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