DOE recognizes states’ role in investigating student loan servicers

Agency Rule-Making & Guidance State Issues Department of Education Student Lending Student Loan Servicer Higher Education Act Preemption

On July 24, the Department of Education (DOE) issued a final interpretation to clarify that the Higher Education Act (HEA) preempts state laws and other applicable federal laws “only in limited and discrete respects.” Specifically, the final interpretation revises and clarifies the DOE’s position on the legality of state laws and regulations regarding certain aspects of the federal student loan servicing, including preventing unfair or deceptive practices, correcting misapplied payments, or addressing servicers’ refusals to communicate with borrowers.

The final interpretation supersedes a 2021 DOE interpretation (covered by InfoBytes here), as well as prior statements and interpretations issued by the agency, which addressed state regulation of the servicing of student loans under the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program. Following a review of public comments, the DOE modified its interpretation to more clearly describe the standard for conflict preemption, explaining that recent court rulings on the issue of conflict preemption have consistently found that the HEA does not prioritize maintaining uniformity in federal student loan servicing, and that as a result, the courts have upheld the authority of individual states to address fraud and affirmative misrepresentations in the federal student aid program without being hindered by federal preemption. Additionally, the DOE noted that courts have consistently applied conflict preemption to state laws that require licensing of the DOE’s student loan servicers, particularly in limited circumstances where the licensing requirement aims to disqualify a federal contractor from operating within the state. The final interpretation states that it is firmly established that states cannot hinder the federal government's ability to choose its contractors by imposing such licensing requirements, noting that two courts recently concluded that such preemption also applies to a state’s refusal to license federal student loan servicers.

The final interpretation is effective immediately.