In recent legislative sessions, states have imposed new regulatory guidelines and created protec- tions designed to help borrowers understand their repayment options and navigate the loan servicing process. Connecticut became the first state in the nation to implement a ”student loan borrower bill of rights” with the passage of HB 6915 in 2015. This bill included provisions to require that stu- dent loan servicers be licensed and registered with the state Department of Banking. It also requires appointing a student loan ombudsman to track and address borrower complaints and collect data re- garding student loan debt, and creating a borrower information course for students and families.
Since 2015, 12 additional states have passed legislation to expand student loan oversight. Many of these bills contain similar provisions to the legislation passed in Connecticut, with at least half including specific language to appoint a student loan ombudsman. Other states have created new licensure and lending requirements for student loan servicers. These requirements include rules for the amount of time a payment can be pro- cessed, requirements to correct errors, and rules that mandate informing consumers of available repayment options. Some bills also include efforts to increase borrower awareness and understand- ing. For example, Pennsylvania HB 2124 (2018) requires higher education institutions to send letters to students with information regarding student loan debt.
The 2019 legislative session saw substantial inter- est in student loan oversight legislation. Nineteen states introduced legislation and seven bills were enacted, more than doubling the number of states that had passed legislation in the prior four years.
Proponents of these bills argue states should take proactive roles in both regulating loan servicers and helping borrowers stay informed about repayment. However, loan servicers argue these regulations drive up costs and create a confusing patchwork system of oversight for student loan repayment.
State regulations for student loan servicers have been contested by the U.S. Department of Edu- cation and in federal court. In March 2018, the Department of Education issued a notice of inter- pretation asserting that state oversight of federal student loans “impedes uniquely federal inter- ests.” The department guidance was particularly concerned with Massachusetts’ lawsuit against a loan servicer but further claimed “attempts by other States to impose similar requirements will create additional conflicts with Federal law.” This policy reversed the guidance from the department in 2016, which stated that state regulations would not preempt federal law.
Shortly after this announcement, the Pennsylvania Higher Education Assistance Agency (PHEAA), a loan servicer, filed suit against the state of Con- necticut. PHEAA claims Connecticut law puts the servicer in conflict with federal law and risks losing its ability to operate in the state. Several other lawsuits have been filed by loan servicers in other states.
In June 2019, the 7th U.S. Circuit Court of Appeals issued a ruling that student loan servicers are subject to state laws related to student loan over- sight and that these laws are not preempted by the federal government. Legal experts have speculated that additional court cases will move forward at the federal level, potentially moving to the U.S. Su- preme Court if rulings conflict at the district level.