In courts across the country, servicers are facing off against states and borrowers over the extent to which federal laws preempt state regulation of federal student loan servicers. Numerous states have stepped up their enforcement activity against student loan servicers and begun enacting new laws aimed at regulating student loan servicing, partially in response to what the states view as a slowdown in federal oversight. Some servicers of federal student loans, pushing back against the state regulations, have argued that the state laws impermissibly conflict with the federal student lending laws.
The dispute largely centers on the Higher Education Act (HEA), which servicers argue preempts all state regulation of federal student loan servicers. Because the HEA and its implementing regulations govern the procedures and standards that servicers must follow when servicing federal student loans, servicers have argued that the HEA preempts all state laws that potentially conflict with the HEA, such as state disclosure and licensing laws. States and borrowers disagree that the HEA completely preempts the state regulation, instead contending that the HEA was never intended to completely preempt state laws and leaves room for states to regulate many aspects of student loan servicing.
The Department of Education, which regulates the federal student loan industry, also weighed in on the debate. The department published an interpretation that sides with the servicers, concluding that state regulation of federal loan servicers is preempted by the HEA. Courts are to give deference to the department’s interpretation, but it is not binding on their decisions. Accordingly, some courts, finding the department’s interpretation persuasive, have held that preemption applies, while other courts have rejected preemption despite the department’s conclusion.
Below are a few of the cases currently progressing through the court system that raise this preemption issue:
Lawson-Ross v. Great Lakes Higher Education Corp. (11th Circuit)
Student loan borrower plaintiffs brought an action against student loan servicer Great Lakes asserting various state common law claims and alleging that Great Lakes misled the plaintiffs with regard to their eligibility for the Public Service Loan Forgiveness program. Noting that federal laws and federal regulations—including the Higher Education Act—impose detailed and complex disclosure requirements on student loan servicers, the district court held that the federal laws preempted the plaintiffs’ state law claims. The court found preemption applied even though the plaintiffs alleged that Great Lakes made affirmative misrepresentations, stating that the failure to provide accurate information is, in essence, covered by the federal disclosure requirements. The court relied upon and deferred to the Department of Education’s interpretation of the HEA. The plaintiffs have appealed the district court’s ruling to the Eleventh Circuit Court of Appeals.
Commonwealth of Pennsylvania v. Navient Corporation et al. (Third Circuit)
The Pennsylvania attorney general brought an action against loan servicer Navient in federal court over alleged abuses in its servicing practices, including allegations related to the origination and servicing of both federal and private student loans. Navient denied the allegations and filed a motion to dismiss arguing, in part, that the HEA preempted the state-law claims. The district court denied Navient’s motion to dismiss, holding that the HEA did not expressly or through conflict preemption foreclose the commonwealth’s state law claims brought under the Pennsylvania Unfair Trade Practices and Consumer Protection Law. The district court determined that the relevant language from the HEA, that federal student loans “shall not be subject to any disclosure requirements of any State law,” 20 U.S.C. § 1098g, did not cover the type of affirmative misconduct alleged by the commonwealth and thus was not directly governed by HEA disclosure requirements. Recognizing that the preemption issue is of “nationwide importance,” the district court certified an interlocutory appeal of the preemption issue. The interlocutory appeal is currently pending before the Third Circuit Court of Appeals.
Student Loan Servicing Alliance v. District of Columbia (D.C. Circuit)
The Student Loan Servicing Alliance (SLSA), on behalf of the student loan servicers that make up its membership, brought action against the District of Columbia alleging that the District of Columbia’s Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act, as well as emergency rules promulgated under that statute, were preempted by federal law and seeking an order permanently enjoining the district from enforcing the law and regulations against student loan servicers. The district court held that the D.C. law and regulations are preempted under principles of conflict preemption as they relate to the servicing of Federal Direct Loan Program and government-owned Federal Family Education Loan Program (FFELP) loans, but not with respect to privately owned, commercial FFELP loans. The decision is currently on appeal by both parties to the D.C. Circuit Court of Appeals.
Nelson v. Great Lakes Educational Loan Services, Inc. (Seventh Circuit)
Plaintiffs brought a putative class action claiming that Great Lakes steered borrowers into less favorable forbearance and deferment programs rather than income-driven or alternative repayment plans. Great Lakes moved to dismiss the plaintiff’s state law claims based on preemption. Great Lakes argued that the HEA and Department of Education’s comprehensive regulations prescribe the disclosures for repayment options provided to borrowers, and thus preempt state laws relating to the same. The district court agreed with Great Lakes, holding that the HEA preempted the state law claims and dismissed the case. The plaintiffs appealed to the Seventh Circuit Court of Appeals. The appeal has been fully briefed and argued, and is pending a decision.
The appeals in the above cases could lead to a split among the circuits on whether federal law preempts state regulation of federal student loan services, which may result in the U.S. Supreme Court weighing in on this significant issue.