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Consumers Union criticizes Education Department for undermining state efforts to ensure student loan servicers treat borrowers fairly

Education Department issues notice challenging state oversight of student loan servicers

WASHINGTON, D.C. – Consumers Union, the advocacy division of Consumer Reports, criticized the Department of Education today for taking steps to undercut the ability of states to ensure student loan borrowers are treated fairly.  In a “notice of interpretation” memo by the Department, the agency maintains that states do not have the authority to oversee federal education loan servicers despite their traditional role protecting consumers from unfair and deceptive financial practices.

“States can and should act to protect borrowers from unfair student loan servicing practices that make it more difficult to manage their debts responsibly,” said Suzanne Martindale, senior attorney for Consumers Union.  “Far too many borrowers get the runaround from loan servicers who fail to maintain accurate records, provide inconsistent information, or simply refuse to help them resolve problems.  If states are prevented or discouraged from overseeing education loan servicers, borrowers may be left with virtually no protections against harmful practices that can push them deeper in debt.”

Today’s notice from the Department is not legally binding in itself; however, it appears to be yet another drastic attempt to reverse any progress on setting common sense ground rules for the industry.

Student loan servicers play a critical role in the success, or failure, of borrowers’ efforts to repay their debt.  Servicers manage borrowers’ accounts, process monthly payments, notify distressed borrowers of and enroll them in alternative repayment plans, and communicate directly with borrowers.  In recent years, the Department of Education has come under criticism for doing little to hold servicers accountable when widespread servicing failures have come to light.

Last year, the Consumer Financial Protection Bureau and the state attorneys general of Illinois, Pennsylvania, and Washington, filed separate lawsuits against Navient, the largest student loan servicer in the U.S., for failing to treat borrowers fairly.  The lawsuits were filed in response to findings that Navient provided borrowers with inaccurate information, processed payments incorrectly, and failed to take action to address consumer complaints.  To make matters worse, the lawsuits alleged that Navient violated the law by making it harder for struggling borrowers with federal loans to enroll in more affordable repayment plans they had the right to access to better manage their debts.

Laws to license and oversee student loan servicers have been enacted in California, Connecticut, Illinois, and Washington, D.C. in recent years.  Washington state just passed a similar law this month and more measures are being considered in New York, New Jersey, Maryland, and Virginia.

Michael McCauley, mmccauley@consumer.org415-902-9537 (cell) or 415-431-6747 (office)