Massachusetts Opens Door For Possible State Regulation of Student Loan Servicers

An action commenced in Massachusetts could have implications for the U.S. Department of Education’s efforts to shield student loan contractors from state oversight.  A Superior Court Judge on Thursday refused to dismiss a lawsuit filed in August by Massachusetts Attorney General Maura Healey against Pennsylvania Higher Education Assistance Agency, a company that manages student loans and grants on behalf of the government.

Healey has accused FedLoan Servicing, of haphazardly handling two federal programs that encourage college graduates to enter fields serving the public good with the promise of loan forgiveness or financial aid.

The case has garnered the attention of the U.S. Department of Justice, which filed papers in January on the Education Department’s behalf arguing that federal law preempts Massachusetts’s claims against FedLoan. That argument is at the heart of a memo recently drafted by the Education Department stating that only the federal government has the authority to oversee federal student loan servicing companies, not states. The memo, which was first reported by Bloomberg, is still being finalized but is a clear attempt by the department to stop a nascent movement of states seeking greater oversight of servicers.

Though Thursday’s ruling does not directly address preemption, some legal experts consider it a sign that the Education Department may have a difficult time defending its position in court challenges that could arise once the final guidance is released. The Education Department did not immediately respond to requests for comment.

Massachusetts has accused FedLoan of mismanaging payments under Public Service Loan Forgiveness, a program that wipes away federal student debt for people in the public sector after they have made 10 years’ worth of payments. The state says the company also mishandled the Teacher Education Assistance for College and Higher Education Grant, a federal program that provides money to students willing to work in high-needs schools or teach high-needs subjects for four years. FedLoan is accused of converting grants to loans in error.

For years, consumer groups, lawmakers and attorneys general have criticized the Education Department for lax monitoring of the companies it pays to manage the $1.4 trillion student loan portfolio. States have been stepping in to fill what many see as a void in federal oversight of student loan servicers. California, Connecticut and the District have used licensing to bring federal student loan servicers under their regulatory purview. Their local agencies have the authority to monitor loan servicers’ compliance with federal laws, investigate their behavior and refer cases to the state attorney general.