Preemptive Strike: Does Federal Law Displace State Regulation of Student Loan Servicers?

Preemptive Strike: Does Federal Law Displace State Regulation of Student Loan Servicers?

Legal Sidebari

Preemptive Strike: Does Federal Law Displace
State Regulation of Student Loan Servicers?
May 31, 2019
The United States is responsible for a large portfolio of student loans. According to recent statistics from
the U.S. Department of Education (ED), almost $1.5 trillion in federal student loans presently remains
outstanding. For many years, the federal government’s role with respect to federal student loans was
primarily that of a guarantor, as the majority of federal student loans “were originated by private sector
and state-based lenders” through the Federal Family Education Loan Program (FFELP). Since July 1,
2010, however, the United States has directly owned and administered the majority of newly issued
federal student loans, which are now made through the Federal Direct Loan Program (FDLP). This
development has expanded the federal government’s role in the student loan context, which has in turn
raised weighty legal questions explored below.
To assist with the administration of student loans, the United States and private lenders alike commonly
hire student loan servicers. These servicers often act as a “middle-man between lenders and borrowers”
by performing functions like (1) communicating with borrowers and (2) collecting and processing loan
payments. Some, however, have accused student loan servicers of engaging in an array of undesirable
conduct, such as steering borrowers away from favorable repayment plans, failing to provide borrowers
crucial information regarding their loans’ terms, and misallocating or misapplying payments. Several
states and the District of Columbia have responded to these concerns by enacting new laws regulating
student loan servicers. Moreover, several state attorneys general and individual borrowers have filed
lawsuits against servicers under preexisting consumer protection statutes or state common law. Servicers
of federal student loans have argued in response that existing federal laws governing student loan
servicers—such as regulations promulgated by ED—leave no room for states to impose servicing
regulations or standards of their own.
In March 2018, ED published an interpretation in the Federal Register articulating the agency’s position
that state “regulatory regimes that impose new regulatory requirements on servicers of loans” are
“preempted by Federal law.” Various courts have also weighed in on this issue, but have reached
divergent conclusions. Some commentators thus speculate that the U.S. Supreme Court may ultimately
resolve this doctrinal split. This Sidebar thus reviews the legal issues surrounding the potential federal
preemption of state student loan servicing laws and highlights relevant considerations for Congress with
respect to how student loan servicers are regulated.
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Student Loan Servicers and Federal Law
Various federal laws govern the selection and operations of student loan servicers. 20 U.S.C. § 1087f, for
instance, provides that, with regard to certain student loans that the federal government directly issues, the
Secretary of ED (Secretary) may only enter into student loan servicing contracts “with entities that have
extensive and relevant experience and demonstrated effectiveness.” Federal regulations likewise contain
several provisions concerning the servicing of certain categories of federal student loans. Additionally, the
terms of a federal loan servicer’s contract with ED may also impose requirements on servicers with
respect to issues like “financial controls, internal monitoring, [and] communications with borrowers.”
Significantly, and of particular relevance to the recent judicial developments, federal law also contains a
provision—20 U.S.C. § 1098g—that expressly exempts certain federal student loans made, insured, or
guaranteed pursuant to the Higher Education Act of 1965 (HEA) from “any disclosure requirements of
any state law.”
However, for the most part, federal law does not empower individual borrowers to enforce federal
servicing regulations directly. The HEA, for instance, does not itself provide borrowers a right to sue a
federal student loan servicer for violating the aforementioned federal laws. Instead, federal law primarily
places the onus on ED to monitor the servicers it hires. Additionally, in 2017, the Consumer Financial
Protection Bureau brought an action—which remains pending in federal district court—against one of the
nation’s largest student loan servicers for allegedly engaging in unfair and deceptive conduct in violation
of the Consumer Financial Protection Act (CFPA). However, that law, like the HEA, does not grant
borrowers a private right of action to pursue violations of the CFPA. Thus, generally speaking, if
borrowers wish to pursue a lawsuit against a federal student loan servicer directly, they must rely on a
state or local law as the basis for their suit.
Student Loan Servicers and State Law
A growing number of states have enacted statutes regulating student loan servicers in various respects.
The District of Columbia (D.C.), for instance, subjects student loan servicers to licensing requirements
and supervision by an “[o]mbudsman who is responsible for resolving borrower complaints, developing a
borrower bill of rights, monitoring and analyzing information and data from borrower complaints,
providing information to student loan borrowers, and conducting examinations of student loan servicers.”
Connecticut similarly imposes a panoply of licensing requirements and other regulations upon student
loan servicers. A number of other states are likewise developing or considering similar legislation. Some
of these laws impose obligations and responsibilities upon student loan servicers that are different from or
broader than those imposed under federal law.
Irrespective of whether a particular state has enacted a law specifically regulating student loan servicers,
many states have statutes and common law doctrines of general applicability that one could use to
regulate a servicer’s conduct, such as consumer protection statutes and common law claims for unlawful
activities like fraudulent misrepresentation. In addition, state attorneys general in a number of
jurisdictions—including California, Illinois, Mississippi, Pennsylvania, and Washington—have invoked
these laws to sue servicers who have allegedly engaged in deceptive conduct within a given state.
Federal Preemption and the ED’s Position
When both federal and state laws coexist in a particular subject area, questions of federal preemption
arise. Under the case law interpreting the Constitution’s Supremacy Clause, federal law can supersede
conflicting state law in two central ways. First, statutory language that expressly addresses the scope of a
law’s preemptive effect, such as 20 U.S.C. § 1098g, may be the basis to conclude that Congress intended
federal law to invalidate certain state laws. Second, even if a statute is silent as to Congress’s preemptive

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intent, implied preemption principles can also displace state law. A statute can implicitly preempt state
law where: (1) the scheme of federal regulation is so pervasive, or the federal interest is so dominant, that
it can be presumed that Congress intended to supplant all state laws in a particular area (also known as
“field preemption”); or (2) the state law conflicts with federal law by either making it impossible to
simultaneously comply with both laws or by frustrating the purposes and objectives of the federal law.
Invoking these principles, ED published an interpretation in March 2018 announcing its position that
federal law preempts a wide range of state laws that regulate federal student loan servicers. ED did not
promulgate this interpretation through notice-and-comment rulemaking; it instead published its
interpretation in the Federal Register as an informal guidance document. Among other things, ED claims
that federal law displaces:
 State laws that “impose regulatory requirements on servicing,” such as laws that “impose
deadlines on servicers for responding to borrower inquiries” or “require specific
procedures to resolve borrower disputes;”
 State regulations “requiring licensure of servicers” of certain federal student loans; and
 State requirements concerning what servicers must disclose to borrowers.
ED grounds its interpretation in a number of implied preemption theories, including conflict preemption
(i.e., that state servicing laws allegedly impede Congress’s objective of establishing uniform federal loan
servicing standards) and field preemption (i.e., that existing federal regulation is comprehensive and
adequate, leaving no role for additional state regulation). ED also relies on express preemption principles,
arguing that 20 U.S.C. § 1098g’s preemption provision broadly bars states from imposing disclosure
requirements. ED “interprets the term ‘disclosure requirements’ under section 1098g . . . to encompass”
not only written disclosures, but also “informal or non-written communications to borrowers.” In addition
to issuing this interpretation, ED has also submitted filings in several cases asking courts to dismiss
lawsuits against student loan servicers on preemption grounds or otherwise narrow or invalidate state
regulations.
The Judicial Battleground
ED’s interpretation and its litigation position have fueled the debate between states and borrowers on one
side—who claim that state servicing statutes may exist harmoniously alongside federal laws and
policies—and the executive branch and servicers of federal student loans on the other—who claim that
those state regulations irreconcilably conflict with supreme federal law. Federal district court cases have
recently involved both (1) laws that specifically regulate student loan servicers and (2) laws of general
applicability that plaintiffs have invoked against servicers.
State and Local Laws Specifically Regulating Student Loan Servicers
With respect to the growing trend of state and local laws specifically regulating student loan servicers,
one recent case addressing preemption of such a law is Student Loan Servicing Alliance v. District of
Columbia. In a challenge brought by an association of student loan servicers, last fall, the U.S. District
Court for the District of Columbia addressed whether federal law preempted a D.C. statute and set of
regulations that created a licensing scheme and standards of conduct for student loan servicing. As an
initial matter, the court did not defer to ED’s determination regarding the federal law’s preemptive effect.
The court reasoned that the ED interpretation consisted of informal agency guidance that was not
sufficiently “thorough, consistent [or] persuasive” to warrant even Skidmore deference (for more on
deference to agency legal interpretations, see this CRS Report), requiring it to perform an independent
analysis regarding the underlying legal question. First, the court rejected the argument that the HEA
precludes all state servicing law by occupying the field of federal student loan servicing regulation.

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Although recognizing the HEA’s comprehensive nature, the court relied on precedent from a number of
appellate courts holding that the HEA generally does not have field preemptive effect. Emphasizing
Congress’s intent, the court observed that Congress took care to explicitly preempt certain state laws in
various provisions throughout the HEA, suggesting an intent to not supplant all state laws in the field.
When analyzing whether the D.C. law conflicted with the HEA, however, the court determined that
D.C.’s licensing scheme posed an obstacle to ED’s ability to select student loan servicers for certain
federal student loans. Specifically, it reasoned that the D.C. law, by requiring the servicers to obtain a
license from D.C., effectively served to “second-guess” the federal government’s decisions to select and
contract with a given loan servicer. The court’s reasoning applied to FDLP loans and government-owned
FFELP loans, but not to commercial FFELP loans, where private lenders own and make decisions
concerning contracting with student loan servicers.
State Laws of General Applicability as Applied to Student Loan Servicers
A number of federal district courts over the past two years have also examined whether borrowers can use
existing state consumer protection statutes and common law to sue federal student loan servicers when the
servicers allegedly provide them with, for example, false or misleading information. The main issue in
these cases has been whether Section 1098g’s language prohibiting “disclosure requirements of any State
law” preempts state law with respect to the servicers’ allegedly deceptive communications. The debate
has focused on whether applying the state’s law in these cases requires the servicer to make additional or
different “disclosures” within the meaning of Section 1098g.
On one hand, several federal district courts have held that Section 1098g does expressly preempt state
laws of general applicability when applied to student loan servicers’ allegedly false or deceptive
communications. For example, in one Illinois case, Nelson v. Great Lakes Educational Loan Services,
Inc., the plaintiff claimed a servicer’s call center employees steered her towards placing her loans into
forbearance, while failing to adequately inform her of other long-term repayment options. Because federal
regulations already prescribe the information that must be provided to federal student loan borrowers, the
district court concluded that the plaintiff’s state law claim would essentially impose additional disclosure
requirements (e.g., a requirement to disclose all options for repayment) on student loan servicers in
conflict with Section 1098g. A federal court in Florida in Lawson-Ross v. Great Lakes Higher Education
Corp. employed similar reasoning in a case where a loan servicer was alleged to have falsely assured the
plaintiffs that they were on track to benefit from the Public Service Student Loan Forgiveness Program.
Even though the plaintiffs argued that they had alleged an affirmative misrepresentation regarding their
eligibility, the court construed the plaintiffs’ claim as one for the servicer’s failure to disclose accurate
information regarding their eligibility, which it found to be impermissible under Section 1098g. In
concluding as such, the Lawson-Ross court cited ED’s interpretation, concluding that ED’s views on the
preemptive effect of federal law were “well-reasoned and sensible.”
On the other hand, several federal district courts examining fairly similar claims (i.e., allegations that
servicers provided incorrect information to borrowers) have reached different conclusions from the
Nelson and Lawson-Ross courts. These contrary holdings allowing the students’ claims to proceed have
viewed such claims as involving affirmative misrepresentations, which the courts distinguished from the
mere failure to provide additional “disclosures” within the meaning of Section 1098g. Moreover, in
Pennsylvania v. Navient Corporation, a federal district court in Pennsylvania ruled, in contrast to the
Nelson case above, that the HEA did not preempt plaintiffs from asserting state law claims that a servicer
had allegedly steered borrowers into forbearance while failing to inform them of other options. The court
reasoned that the defendant’s argument went “too far” in framing the plaintiff’s claim as one for lack of
disclosure, rather than a claim concerning unfair and deceptive conduct subject to the state consumer
protection statute. The court further distinguished a Ninth Circuit case from 2010 on which Nelson and
ED’s interpretation relied—Chae v. SLM Corp.—because that case involved allegations concerning the

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misleading nature of written account statements and coupon books (i.e., “highly prescribed standardized
forms”), rather than the “affirmative misconduct” and types of communications regulated by
Pennsylvania law. Appeals in the Navient, Nelson, and Lawson-Ross cases are currently pending.
Legal Considerations for Congress
Because congressional purpose “is the ultimate touchstone” when conducting any preemption analysis,
Congress may respond to these conflicting judicial opinions by specifying to what extent it intends federal
law to preempt state servicing laws. To illustrate, a section of the proposed PROSPER Act (H.R. 4508)
introduced in the 115th Congress, if enacted, would have provided that the servicing of particular
categories of educational loans would “not be subject to any law or other requirement of any State or
political subdivision of a State” with respect to:
 “disclosure requirements;”
 “requirements or restrictions on the content, time, quality, or frequency of
communications with borrowers, endorsers, or references with respect to such loans;” or
 “any other requirement relating to the servicing or collection of a loan made under”
specified provisions of the HEA.
Alternatively, if Congress intends to limit the preemptive scope of federal law, it could consider enacting
a savings clause that specifies that federal law does not preempt any state law that imposes more
restrictive requirements on federal student loan servicers than those that already exist under federal
statutes and regulations. Unless and until Congress acts on this issue, however, legal questions regarding
the preemptive scope of federal servicing laws will be left to the courts to resolve. Depending on their
content, the courts’ legal rulings may in turn have public policy ramifications with respect to the
uniformity of servicing regulations across jurisdictions and the level and type of oversight to which
federal student loan servicers are subject.

Author Information

Kevin M. Lewis
Nicole Vanatko
Legislative Attorney
Legislative Attorney

Congressional Research Service
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