AP Photo/Seth Wenig, File
- Financial regulators from all 50 states urged the Education Dept. to crack down on student-loan servicers.
- They want to regulate them, and asked Biden to rescind a Trump-era policy that keeps states from regulating servicers.
- This October, borrowers will have to resume paying their loans, which the servicers handle.
- See more stories on Insider's business page.
All 50 states agree on something: Student-loan servicers, or the companies that charge you interest if you have any debt from higher education, need to be reined in.
On Tuesday, the Conference of State Bank Supervisors (CSBS), comprising financial regulators from every state, joined the North American Collection Agency Regulatory Association (NACARA) in urging Education Secretary Miguel Cardona in a letter to rescind Trump-era policies that put the protections of student-loan borrowers at risk.
Specifically, with the pause on student loan payments expected to lift in October, the two organizations want to ensure state financial regulators will have the ability to regulate student-loan servicers and ensure they are properly preparing borrowers to resume payments, and this can only be done be rescinding an "unwise and misguided" 2018 notice that preempts state regulation of federal servicers.
"Access to records is an indispensable aspect of the police and regulatory authority; encumbering this power with artificial procedural hurdles can chill effective supervision to the detriment of student loan borrowers," the letter said. "Federal student loan servicers are federal contractors, but they are not federal instrumentalities."
The Trump policy at issue was enacted in 2017, following a nationwide movement to crack down on servicers that began during the Obama administration. During that time, more than half of the 50 states either proposed or enacted legislation to regulate student-loan servicers.
Trump's Education Department changed that with a memo that said the Privacy Act of 1974 prevented student-loan servicers from supplying state regulators with any documentation unless the department approved. Then the 2018 notice followed, insulating student-loan servicers from any type of state regulation.
While President Joe Biden's Education Department established a streamlined process for state regulators to get information in May, CSBS and NACARA said more "robust collaboration and coordination" is needed to make state regulators and the department regulatory partners.
The American Bar Association wrote a paper last year detailing how states' roles in student-loan servicer regulation has evolved over the years. In 2015, Connecticut was the first to enact a law that required licensure of servicers, and other states followed suit, including in Colorado, Maine, and Illinois.
Insider previously reported on efforts in Congress to better regulate student-loan servicers. For example, Massachusetts Sen. Elizabeth Warren led some of her Democratic colleagues in requesting information from the CEOs of all servicers on how they are preparing borrowers to restart payments, and in an April hearing, she invited some of those CEOs to testify on the impact of student debt on borrowers.
And most recently, she sent a letter to Pennsylvania Higher Education Assistance Agency (PHEAA) CEO James Steeley regarding "what appear to be false and misleading" statements from his testimony during the hearing, regarding the agency's administration of a public loan forgiveness program that rejects 98% of borrowers.
"We appreciate that the Education Department has indicated that it recognizes state authority," CSBS President John Ryan said in a statement. "However, more definitive action is necessary to better protect federal student loan borrowers, to allow effective supervision of student loan lenders and to respect the authority of the state system."