Rule2023-15436
Federal Preemption and Joint Federal-State Regulation and Oversight of the Department of Education's Federal Student Loan Programs and Federal Student Loan Servicers
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
July 24, 2023
Effective
July 24, 2023
Issuing agencies
Education Department
Abstract
The U.S. Department of Education (Department) issues this final interpretation, which revises and supersedes its interpretation published on August 12, 2021 (the 2021 interpretation). This interpretation revises and clarifies the Department's position on the legality of State laws and regulations that govern various aspects of the servicing of Federal student loans, such as preventing unfair or deceptive practices, correcting misapplied payments, or addressing refusals to communicate with borrowers. The Department concludes that these State laws are preempted by the Higher Education Act of 1965, as amended (HEA) and other applicable Federal laws only in limited and discrete respects, as further discussed in this interpretation. This interpretation will help facilitate close coordination between the Department and its State partners to further enhance both servicer accountability and borrower protections.
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[Federal Register Volume 88, Number 140 (Monday, July 24, 2023)]
[Rules and Regulations]
[Pages 47370-47375]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-15436]
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DEPARTMENT OF EDUCATION
34 CFR Chapter VI
[Docket ID ED-2021-OS-0107]
Federal Preemption and Joint Federal-State Regulation and
Oversight of the Department of Education's Federal Student Loan
Programs and Federal Student Loan Servicers
AGENCY: Office of the Secretary, Department of Education.
ACTION: Final interpretation.
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SUMMARY: The U.S. Department of Education (Department) issues this
final interpretation, which revises and supersedes its interpretation
published on August 12, 2021 (the 2021 interpretation). This
interpretation revises and clarifies the Department's position on the
legality of State laws and regulations that govern various aspects of
the servicing of Federal student loans, such as preventing unfair or
deceptive practices, correcting misapplied payments, or addressing
refusals to communicate with borrowers. The Department concludes that
these State laws are preempted by the Higher Education Act of 1965, as
amended (HEA) and other applicable Federal laws only in limited and
discrete respects, as further discussed in this interpretation. This
interpretation will help facilitate close coordination between the
Department and its State partners to further enhance both servicer
accountability and borrower protections.
DATES: This final interpretation is effective July 24, 2023.
FOR FURTHER INFORMATION CONTACT: Beth Grebeldinger, U.S. Department of
Education, Federal Student Aid, 830 First Street NE, Room 113F4,
Washington, DC 20202. Telephone: 202-377-4018. Email:
<a href="/cdn-cgi/l/email-protection#6c2e091804422b1e090e09000805020b091e2c0908420b031a"><span class="__cf_email__" data-cfemail="f8ba9d8c90d6bf8a9d9a9d949c91969f9d8ab89d9cd69f978e">[email protected]</span></a>. If you use a telecommunications device for
the deaf (TDD) or a text telephone (TTY), call the Federal Relay
Service (FRS), toll free, at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
Background
On August 12, 2021, the Department published the 2021
interpretation in the Federal Register. We invited comment on this
interpretation because we value the public's input and perspective on
these critical issues. We considered all the comments we received, and
we decided to revise the 2021 interpretation in certain respects, as
discussed below. This interpretation revises and supersedes the 2021
interpretation with respect to State regulation of the servicing of
loans under both the William D. Ford Federal Direct Loan Program
(Direct Loans) and the Federal Family Education Loan Program (FFEL
Loans).
Public Comment: In response to our invitation to comment on the
2021 interpretation, 14 parties submitted substantive comments, and we
received 1 comment that was unrelated to the interpretation.
Analysis of Comments and Changes: An analysis of the comments and
any changes in the interpretation since publication of the 2021
interpretation follows. We do not address comments that raised concerns
not directly related to the 2021 interpretation. Various technical and
typographical edits have also been made as needed.
Comments: Several commenters suggested that we should specify that
the revised interpretation supersedes not only the 2018 interpretation
but also any statements by the Department either before or since that
are inconsistent with this interpretation.
Discussion: We note that after publication of the 2018
interpretation there were statements by Department officials which were
consistent with that interpretation. While those statements do not have
any current legal import, we agree with the commenters that it is
important to make clear that this interpretation supersedes any of
those statements that are not consistent with this interpretation to
ensure an accurate and consistent presentation of
[[Page 47371]]
the Department's interpretation on preemption.
Changes: We have modified the interpretation to specifically note
that it supersedes prior statements by the Department that are not
consistent with this final interpretation.
Comments: Several commenters suggested that the 2021 interpretation
was focused too narrowly on State laws affecting ``affirmative
misrepresentations'' as not being subject to preemption and should also
specifically address other types of State laws relating to loan
servicers' conduct, such as State laws governing dispute resolution
procedures for loan servicers or state laws governing licensure.
Discussion: Both the 2021 interpretation and this final
interpretation address state laws governing licensure of student loan
servicers. Otherwise, we have retained the broad discussion of state
laws governing servicer conduct rather than specifically address
specific types of those laws. An interpretation that focuses on
preemption of specific types of state laws could be read as more narrow
than intended and result in further litigation between states and
servicers.
Changes: None.
Comments: One commenter noted that the revised interpretation did
not address every court decision on the preemption of State laws
relating to student loan servicing.
Discussion: The 2021 interpretation discussed the court decisions
which the Department determined are most pertinent to and most
persuasive on the issues addressed in the interpretation. The revised
interpretation is in accord with those decisions.
Changes: None.
Comments: Several commenters suggested that the 2021 interpretation
did not appropriately describe the standard for conflict preemption.
Discussion: We believe that the discussion of conflict preemption
in the 2021 interpretation appropriately described the legal standard.
However, we acknowledge that the discussion could be made clearer and
have done so in this final interpretation.
Changes: We have modified the discussion of conflict preemption to
more clearly describe the applicable legal standard.
The Department's interpretation is presented here in its final
form.
Final Interpretation
A. General Preemption Principles
The Supreme Court has established fundamental principles of Federal
preemption doctrine over more than two centuries. Throughout the
history of our country, the Court has repeatedly emphasized that claims
of preemption of State law are construed to reflect `` `the clear and
manifest purpose of Congress.' '' Cipollone v. Liggett Group, Inc., 505
U.S. 504, 516 (1992) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S.
218, 230 (1947)). And where, as here, Congress legislates in a field
traditionally occupied by the States, the Court at times has held that
the presumption against preemption ``applies with particular force.''
Altria Group, Inc. v. Good, 555 U.S. 70, 77 (2008); see, e.g., Pacific
Gas & Elec. Co. v. State Energy Resources Conservation & Dev't Comm'n,
461 U.S. 190 (1983) (Federal licensing of safety designs for nuclear
power plants did not preempt State action suspending construction of
such plants on economic grounds).
In 2015, Connecticut became the first State to enact a law
requiring licensure and oversight of student loan servicers operating
in the State. In its wake, a growing number of States have followed
suit by enacting their own laws or adopting their own regulations.
These laws or regulations provide for licensure and oversight of
student loan servicers. They also typically confer or confirm
protections for citizens against prohibited acts such as engaging in
unfair, deceptive, or fraudulent acts or practices; misapplying
payments; reporting inaccurate information to credit bureaus; or
refusing to communicate with an authorized representative of the
student loan borrower.
The States that have created these regulatory regimes assert that
they are acting under their general police powers for the purpose of
protecting their citizens. That is a zone in which preemption is at its
weakest. Particularly ``in a field which the States have traditionally
occupied,'' Wyeth, 555 U.S. at 565, the Supreme Court has emphasized
the need to begin ``with the assumption that the historic police powers
of the States are not to be superseded by Federal Act unless that is
the clear and manifest purpose of Congress.'' Cipollone, 505 U.S. at
516. One area that states have traditionally occupied is consumer
protection, which has traditionally been regulated by the States, with
more limited and occasional Federal involvement. See, e.g., California
v. ARC Am. Corp., 490 U.S. 93, 101 (1989); Florida Lime & Avocado
Growers, Inc. v. Paul, 373 U.S. 132, 146 (1963).
B. Field Preemption
The 2018 interpretation opined that ``the statutory and regulatory
provisions and contracts governing the Direct Loan Program preclude
State regulation, either of borrowers or servicers.'' 83 FR at 10621.
It further stated that ``the HEA and Department regulations governing
the FFEL Program preempt State servicing laws that conflict with, or
impede the uniform administration of, the program.'' Id.
This broad assertion of power--that Federal law preempts the entire
field of law relating to Federal student loan servicing--has largely
been rejected by the courts. That is particularly the case where
Congress has considered the matter and expressly preempted specific but
limited areas of State law, as discussed below. Indeed, ``no circuit
court that has considered the issue has found field preemption'' to
apply in the context of the HEA. Lawson-Ross v. Great Lakes Higher
Educ. Corp., 955 F.3d 908, 923 (11th Cir. 2020); see also Nelson v.
Great Lakes Educ. Loan Services, Inc., 928 F.3d 639, 652 (7th Cir.
2019) (``Courts have consistently held that field preemption does not
apply to the HEA, and we do as well.''); Chae v. SLM Corp., 593 F.3d
936, 941-42 (9th Cir. 2010) (same); Cliff v. Payco Gen. Am. Credits,
Inc., 363 F.3d 1113, 1125-26 (11th Cir. 2004) (same); Armstrong v.
Accrediting Council for Continuing Educ. & Training, Inc., 168 F.3d
1362, 1369 (D.C. Cir. 1999) (same).
At no time prior to the issuance of the 2018 interpretation did the
Department take the view that field preemption applied to the servicing
and collection of Federal student loans, and the courts have held that
the Department did not provide persuasive reasons for its new position.
After reexamining the issue, the Department rejects the analysis
included in the 2018 interpretation. The Department concludes, in line
with its position prior to the 2018 interpretation, that field
preemption does not apply to the servicing and collection of Federal
student loans.
C. Express Preemption
The 2018 interpretation further asserted broad preclusion of State
student loan servicing laws on the ground that any State efforts to
require Federal student loan servicers to reveal facts or information
not required by Federal law are expressly preempted under the HEA. See
83 FR at 10,621. By painting with such a broad brush, the 2018
interpretation failed to consider more carefully the specific terms of
applicable Federal laws and how they apply to State regulatory efforts.
[[Page 47372]]
In fact, the HEA does contain some specific provisions that
explicitly preempt certain areas of State law, but those provisions are
limited and selective. They include restrictions on such matters as the
application of State usury laws, see 20 U.S.C. 1078(d), of State
statutes of limitation, see 20 U.S.C. 1091a(a)(2), of the State-law
defense of infancy, see 20 U.S.C. 1091a(b)(2), of State wage
garnishment laws, see 20 U.S.C. 1095a(a), of State laws on certain
costs and charges, see 20 U.S.C. 1091a(b), and of State disclosure
requirements that conflict with 20 U.S.C. 1083, see 20 U.S.C. 1098g.
These provisions, granular as they are, reinforce the point that
Congress consciously opted to displace State authority only in these
limited particulars and did not intend or provide for broad field
preemption of State laws governing student loan servicing. See, e.g.,
Nelson, 928 F.3d at 650 (``The number of those provisions and their
specificity show that Congress considered preemption issues and made
its decisions. Courts should enforce those provisions, but we should
not add to them on the theory that more sweeping preemption seems like
a better policy.''). They also undermine any broad finding of express
preemption, which requires courts to ``identify the domain expressly
preempted by that language.'' Medtronic, Inc. v. Lohr, 518 U.S. 470,
484 (1996). In the HEA, Congress identified a series of pinpoints
rather than casting a wide blanket over the entire area, and its
actions must be respected in determining the scope of preemption of
State law. See id. at 485 (intent of Congress is the ``ultimate
touchstone'' of preemption analysis).
The 2018 interpretation put special emphasis on the HEA provision
addressing State ``disclosure requirements.'' See 83 FR at 10,621. It
observed that this provision specified ``what information must be
provided in the context of the Federal loan programs,'' and expanded
upon the provision by stating that it also nullified any State
``prohibitions on misrepresentation or the omission of material
information.'' Id. But the courts have generally rejected this
approach. First, this provision of the HEA covers information conveyed
to the borrower before the disbursement of loan proceeds, before
repayment of the loans begins, and during repayment of the loans. The
information disclosed is ``intended to ensure that consumer-borrowers
have accurate, relevant information and can make their own informed
choices about their financial affairs.'' Nelson, 928 F.3d at 647.
Notably, the HEA provision on disclosure requirements does not cover
explicit or implicit misrepresentations, which are not about conveying
either more or less information, but instead are simply about conveying
accurate information so as not to mislead or defraud the borrower. The
courts found this distinction between misrepresentations and failure to
disclose to be deeply grounded in basic principles of the common law of
torts, which sharply distinguish failure-to-disclose claims from claims
for affirmative misrepresentation. See, e.g., Lawson-Ross, 955 F.3d at
917-19; Nelson, 928 F.3d at 647-49.
Second, the 2018 interpretation purported to rely on the Ninth
Circuit's decision in the Chae case, which concerned the failure to
disclose information in the specific ways required in Federal law, such
as in billing statements. But the findings in Chae do not preclude
State regulation of affirmative misrepresentations or deceptive acts or
practices about information that the servicer was not required to
disclose or other types of misconduct. See Chae, 593 F.3d at 943. Nor
can such actions plausibly be reframed as a mere ``failure to
disclose'' correct information. Pennsylvania v. Navient Corp., 967 F.3d
273, 289-90 (3d Cir. 2020). The Chae court drew this same distinction,
holding that the ``use of fraudulent and deceptive practices apart from
the billing statements'' are not preempted by Federal law. See Chae,
593 F.3d at 943; see also Lawson-Ross, 955 F.3d at 919 (discussing
Chae); Nelson, 928 F.3d at 649-50 (same).
For these reasons, the Department finds that, except in the limited
and specific instances set forth in the HEA itself, State measures to
engage in oversight, require actions of, or otherwise regulate the
conduct of Federal student loan servicers are not expressly preempted
by the HEA. Accordingly, in reconsidering the issue of express
preemption the Department does not find the conclusions reached in the
2018 interpretation to be persuasive. Likewise, the courts generally
have not been persuaded when these issues have been presented to them.
See, e.g., Student Loan Servicing Alliance, 351 F. Supp. 3d at 51-55;
Lawson-Ross, 955 F.3d at 916-20; Nelson, 928 F.3d at 647-50.
D. Conflict Preemption
When, as here, both the Federal government and the States have
legitimate interests in the same areas of governance, courts frequently
implement constitutional principles of federalism by seeking to balance
and respect those mutual interests. Where the two exercises of
authority collide in irremediable conflict, then State law must yield
to the superior force of the Supremacy Clause. But courts often have
sought to harmonize Federal and State power where they find that they
can do so. Therefore, implied conflict preemption has been regarded as
only nullifying State action if ``it is impossible for a private party
to comply with both state and federal law'' or if State law ```stands
as an obstacle to the accomplishment and execution of the full purposes
and objectives of Congress.''' Crosby v. National Foreign Trade
Council, 530 U.S. 363, 373 (2000) (quoting Hines v. Davidowitz, 312
U.S. 52, 67 (1941)).
Although the 2018 interpretation laid out some generalized grounds
on which Federal and State regulations of student loan servicers could
be found to clash, the courts have rejected these arguments. They have
noted the Supreme Court's overarching point that where the enacted
legislation explicitly addressed the issue of preemption, as is true of
the HEA, ``there is no need to infer congressional intent to preempt
State laws from the substantive provisions of the legislation.''
Cipollone, 505 U.S. at 517; see also Navient, 967 F.3d at 292-93;
Lawson-Ross, 955 F.3d at 920; Nelson, 928 F.3d at 648.
When the court in Student Loan Servicing Alliance considered the
District of Columbia's procedures for protecting privacy, resolving
complaints, and mandating compliance with timelines, it concluded that
``[u]pon closer inspection of the state and federal provisions, it is
apparent that there is no actual conflict on the grounds of
impossibility.'' 351 F. Supp. 3d at 60. The court determined that each
objection raised by the plaintiff about the supposed inability to
harmonize Federal and State procedures posited ``a false conflict'' and
could be accommodated by officials who are willing to work together in
taking reasonable steps to do so. Id. at 60-61.
The most recent courts to consider these issues under the rubric of
conflict preemption have consistently determined that the HEA places no
emphasis on maintaining uniformity in Federal student loan servicing
and thus they have upheld State authority to root out fraud and
affirmative misrepresentations in the Federal student aid program. See,
e.g., Navient, 967 F.3d at 292-94 (explicitly rejecting Chae on this
point); Lawson-Ross, 955 F.3d at 920-23 (same); Nelson, 928 F.3d at
650-51 (same).
Courts have generally found conflict preemption to apply to State
laws
[[Page 47373]]
requiring licensing of the Department's student loan servicers in the
limited circumstances where the licensing scheme purported to
disqualify a Federal contractor from working within the State's
boundaries. It is well-established that States cannot impede the
Federal Government's selection of contractors through the imposition of
a licensing requirement. In Leslie Miller Inc. v. Arkansas, 352 U.S.
187 (1956) (per curiam), the Supreme Court held that Federal bidding
statutes and regulations requiring the selection of ``responsible
bidder[s]'' for Federal contracts would be frustrated by ``giv[ing] the
State's licensing board a virtual power of review over the federal
determination'' about selecting its own contractors. Id. at 190.
Two recent Federal court decisions have concluded that this well-
established precedent applies to a State's refusal to license Federal
student loan servicers. In Student Loan Servicing Alliance, the Court
concluded that the District of Columbia's licensing scheme was
preempted because it would bar Federal student loan contractors from
working within the District. See 351 F. Supp. 3d at 61-72, 75-76.
Similarly, in Pennsylvania Higher Education Assistance Agency v. Perez,
457 F. Supp. 3d 112, 122-25 (D. Conn. 2020), the Court concluded that
the State's authority to grant or withhold a license to a Federal
student loan servicer was preempted because it could disqualify Federal
student loan contractors from operating within the State. Notably,
neither of these decisions relied on the 2018 interpretation in
concluding that State laws relating to licensing were preempted; and in
fact, in Student Loan Servicing Alliance, the court explicitly rejected
the preemption analysis in the 2018 interpretation.
E. Direct Loan Program and Preemption
The Direct Loan program, which was created as part of the Student
Loan Reform Act of 1993 (Pub. L. 103-66), poses some specific statutory
and regulatory issues of preemption. In this program, the Federal
government makes loans directly to the borrower and is responsible for
all aspects of the loan from origination through repayment, including
servicing and collection. Congress also provided that the Department
could use contractors to service the loans and for any other purposes
deemed ``necessary to ensure the successful operation of the program.''
20 U.S.C. 1087f(b)(4). When procuring such services, the Department
must comply with all applicable Federal laws and regulations and design
its program so that the loan servicing is ``provided at competitive
prices.'' 20 U.S.C. 1087f(a)(1). And the Department specifies in some
detail ``the responsibilities and obligations of the servicers for
Direct Loans.'' 2018 interpretation, 83 FR at 10,620.
The 2018 interpretation observed that in some instances, these
provisions would operate to preempt State requirements that directly
conflicted with requirements imposed under Federal law. For example, as
discussed above, an attempt by a State to revoke a license granted to a
Federal contractor by the Federal government for purposes established
under Federal law would be invalid. Leslie Miller, 352 U.S. at 190. Yet
this does not imply that a State cannot act to impose reasonable,
generally applicable conditions on entities (including Federally
licensed contractors) operating within the bounds of the State, as
authorized under its police powers exercised on behalf of its citizens.
As courts addressing this issue have correctly concluded: ``Properly
understood, state law and federal law can exist in harmony here'' under
the HEA. Nelson, 928 F.3d at 651; see also Navient, 967 F.3d at 293-94
(quoting Nelson). Cf. California Coastal Comm'n v. Granite Rock Co.,
480 U.S. 572 (1987) (``Rather than evidencing an intent to preempt such
state regulation, the Forest Service regulations appear to assume
compliance with state laws.'').
Where the States impose conduct requirements that prohibit
misrepresentations and other types of misconduct by student loan
servicers, many of those measures are not preempted by general
disclosure requirements in Federal law. See, e.g., Cipollone, 505 U.S.
at 529 (``State-law prohibitions on false statements of material fact
do not create `diverse, nonuniform, and confusing' standards.'').
Notably, the courts have repudiated the expansive approach taken in the
2018 interpretation, which was premised on the claim that the purpose
of the Direct Loan program was to ``establish a uniform, streamlined,
and simplified lending program managed at the Federal level.'' 83 FR at
10,621. See, e.g., Navient, 967 F.3d at 293 (finding no legislative
support for uniformity here); Lawson-Ross, 955 F.3d at 921-22 (same);
Nelson, 928 F.3d at 651 (same); College Loan Corp. v. SLM Corp., 396
F.3d 588, 597 (4th Cir. 2005) (same). Indeed, it is telling that
Congress's own stated purposes in the HEA itself make no mention of
uniformity, see Lawson-Ross, 955 F.3d at 921, and the Supreme Court has
held that courts are not to infer preemption merely from the
comprehensive nature of Federal regulation. See New York State Dep't of
Social Servs. v. Dublino, 413 U.S. 405, 415 (1973).
The cases rejecting the claims made in the 2018 interpretation
about the need for uniformity also point out that ``[e]ven if we assume
that uniformity is a purpose of the HEA, [claims about affirmative
misrepresentations by loan servicers] would not conflict with that
purpose.'' Lawson-Ross, 955 F.3d at 922-23. Even such uniformity as
does exist in the program ``is not harmed by prohibiting unfair or
deceptive conduct in the operation of the program that is not
explicitly permitted by the HEA.'' Pennsylvania v. Navient Corp., 354
F. Supp. 3d 529, 553 (M.D. Pa. 2018), aff'd, 967 F.3d 273 (3d Cir.
2020).
For similar reasons, the arguments in the 2018 interpretation that
accompany the arguments for uniformity, which relate to reducing costs
and treating borrowers equitably while not confusing them, see 83 FR at
10,620-21, are likewise unavailing. Reducing costs by making fraudulent
or false statements to student loan borrowers or engaging in other
misconduct is indefensible as a tactic; and allowing such misconduct to
be perpetrated on a mass scale would neither foster equitable treatment
for borrowers nor spare them any confusion. In addition, relieving
Federal contractors of any exposure to liability for fraud, false
statements, or other actions that harm borrowers would save them money,
to be sure, but it would be a breathtakingly broad assertion of
preemption, given that such contractors are routinely subject to
liability for violating State tort laws.
F. FFEL Program Loans and Preemption
As with the Direct Loan program, the FFEL program poses some
specific statutory and regulatory issues of preemption. The general
treatment of these issues runs parallel to the discussion for Direct
Loans, in that some specific Federal laws and regulations preempt State
laws that conflict squarely on matters such as timelines and other
particulars of debt collection and loan servicing. But here, too, the
grounds for preemption of State laws are narrow and liability under
State law for many other matters such as dispute resolution processes,
affirmative misrepresentations, or other types of misconduct that harm
loan borrowers would not be preempted.
In the past, the Department had identified specific types of State
laws that are preempted because they would frustrate the operation and
purposes of the Federal student loan programs. On October 1, 1990, for
instance, the Department issued a notice interpreting
[[Page 47374]]
its regulations governing the FFEL program (then known as the
Guaranteed Student Loan program), which require guaranty agencies and
lenders to take certain actions to collect FFEL program loans. The
Department's position in that interpretive notice was that the
regulations requiring those activities preempt State laws regarding
those very same activities. See 55 FR 40,120. More specifically, the
Department explained that its regulations establish minimum collection
actions required on all FFEL obligations, which preempt contrary or
inconsistent State laws that would prevent compliance with the Federal
regulations. See id. at 40,121. These regulations for the FFEL Program
are now codified at 34 CFR 682.410(b)(8) and (o).
The 2018 interpretation identified additional categories of State
laws that it viewed as inconsistent with specific Federal measures.
These included laws creating deadlines for servicers to respond to
borrower inquiries or disputes; deadlines for notifying borrowers of
loan transfers between servicers; and a few other miscellaneous items.
See 83 FR at 10,621-22. According to the 2018 interpretation, if those
specific State laws directly contradicted an equally specific Federal
law, they were preempted.
However, and as discussed above, preemption issues are necessarily
contextual and fact-specific and cannot be determined without analysis
of specific State requirements and the equally specific Federal
measures with which they purport to conflict. Moreover, mere
inconsistency is not the test for preemption; instead, these specific
State laws are only preempted where ``it is impossible . . . to comply
with both state and federal law'' or if State law poses ``an obstacle''
to accomplishing the full purposes of Congress. Crosby, 530 U.S. at
373. Simply because some provisions of Federal and State law may not be
precisely the same in every respect does not mean they cannot be
applied in a coordinated manner as a cooperative regulatory regime.
As with Direct Loans, moreover, the limits of preemption are
reached when the discussion moves beyond simply setting specific
details of such ``administrative mechanisms.'' Nelson, 928 F.3d at 651.
At the heart of State laws and regulations in this area are measures
designed to protect consumers. There may be many such measures that are
not preempted by the general disclosure requirements in Federal law,
such as State measures that prohibit affirmative misrepresentations by
loan servicers. See, e.g., Lawson-Ross, 955 F.3d at 922-23. But this
interpretation should not be read to suggest that only State laws and
regulations relating to affirmative misrepresentation are not
preempted. States may consider and adopt additional measures which
protect borrowers and can be harmonized with Federal law. These
measures can be enforced by the States, and the Department can and will
work with State officials to root out all forms of fraud, falsehood,
improper conduct, and other harms to borrowers that may occur in the
Federal student aid programs.
G. Enhanced Borrower Protections Through Federal-State Cooperation
The final section of the 2018 interpretation cautioned that broad
preemption of State student loan servicer laws would not leave
borrowers unprotected, and it elaborated ways that the Department
``continues to oversee loan servicers to ensure that borrowers receive
exemplary customer service and are protected from substandard
practices.'' 83 FR at 10,622. In this interpretation, the Department
reaffirms these important objectives and its determination to hold
servicers accountable for failing to meet these standards and
expectations. Indeed, this approach is embodied in the newest contracts
that the Department has executed with its loan servicers, which include
provisions to improve performance, accountability, and transparency.
The contracts also include requirements that the loan servicers must
comply with applicable State laws, which embodies the Department's
recognition that State laws are generally not preempted.
Yet the Department also finds that broad preemption of State
student loan servicer laws would disserve these objectives for two
reasons. First, State officials serve as an essential complement to the
Federal government in protecting their citizens from substandard or
improper practices. Second, as explained below, the Department has
concluded that close coordination with its State partners will further
enhance both servicer accountability and borrower protections.
Accordingly, the Department has considered the matter further and
finds that the approach taken in the 2018 interpretation is seriously
flawed. For all the reasons stated in this interpretation, the
Department is affirmatively changing its approach to preemption of
State student loan servicing laws that was laid out in the 2018
interpretation. To the extent that the final section of the 2018
interpretation purported to provide additional factual material
intended to justify its position, those underpinnings are examined more
carefully below, and the Department concludes that they do not support
the 2018 interpretation either as a historical matter or, as a factual
matter, in the likelihood that such an exclusionary approach will
succeed in attaining its stated objectives. See, e.g., FCC v. Fox
Television Stations, Inc., 556 U.S. 502 (2009) (agency may change prior
policy without being subject to any more searching judicial review
where the agency acknowledges the change of position and accounts for
any claimed factual underpinnings of the prior policy).
As a historical matter, the Federal government and the States have
sought to work closely and cooperatively in certain areas of shared
responsibility, such as law enforcement and consumer protection. All
parties recognize that the country is vast, its population has grown to
immense proportions, and public resources are limited. Administration
of Federal student loans involves managing customer relationships for
tens of millions of borrowers in a variety of circumstances and for
distinct loan programs with different requirements that have grown up
over the past several decades. The complexity and scope of the task is
shown by the Department's longstanding practice of engaging large
private contractors operating nationwide to service millions of
borrowers with cumulative debts that in the aggregate now exceed $1.5
trillion. Managing these outside contractors to assure that the student
loan program operates effectively and in line with its intended
objectives is a substantial undertaking, and the oversight challenges
are evident and significant.
The Department recognizes that collaboration with the States can
supply the means to ensure better oversight of these contractors and
provide more protection for student loan borrowers. Not all States have
invested resources in overseeing loan servicers, but to the extent that
they have, some State attorneys general and State student loan
servicing regulators, with their own capacities and personnel, are able
to maintain a closer watch over how these loan servicers operate in
their States, including how borrowers are being treated and how their
needs are being met. Although the 2018 interpretation strove to justify
how the Department could perform this oversight task adequately on its
own, the Department now finds that a different approach is more likely
to succeed: a coordinated
[[Page 47375]]
partnership of interested Federal and State officials will produce a
more robust system of supervision and enforcement to monitor and
improve performance under this far-flung system.
In the 2018 interpretation, the Department explained as a factual
matter how it would seek to monitor servicer compliance with
contractual requirements related to customer service, including call
monitoring, process monitoring, and servicer auditing. See 83 FR at
10,622. It also described how it uses contracting requirements to
incentivize improved customer service and maintain mechanisms for
reviewing and responding to complaints about customer service. But the
Department's limited resources for compliance monitoring must also
encompass various other issues unrelated to customer service, such as
compliance with billing practices and other related operational issues.
And many of the recently enacted State laws are designed to focus
squarely on customer service issues: servicers engaging in unfair,
deceptive, or fraudulent acts or practices; servicers misapplying
payments; servicers reporting inaccurate information on borrower
performance to credit bureaus; and servicers refusing to communicate
with borrowers' authorized representatives. See, e.g., Conn. Gen. Stat.
Sec. 36a-850 (2016); 110 Ill. Comp. Stat. 992/20-20(i) (2018); Colo.
Rev. Stat. Sec. 5-20-109 (2019). Notably, a growing number of States
are enacting these laws because of the documented need for more
attention to problems adversely affecting their citizens. Rather than
viewing this activity by the States as inconvenient or detrimental to
its objectives, the Department now recognizes that State regulators can
be additive in helping to achieve the same objectives championed in the
2018 interpretation. Rather than expending time and effort contesting
the authority of the States in unproductive litigation, the Department
intends to work with the States to share the burdens and costs of
oversight to ensure that loan servicers are accountable for their
performance in better serving borrowers.
Indeed, a collaborative approach where Federal and State officials
work together to achieve shared objectives will likely produce a sum
that is greater than its individual parts. The Department's budget is
not unlimited and maintaining effective oversight of student loan
servicers that deal with tens of millions of borrower accounts is a
mammoth task. Further examples discussed in the 2018 interpretation
only underscore this point. For instance, the Department has built
incentives into the servicer contracts to favor better-performing
servicers at the expense of poorer-performing ones, to attain higher
levels of customer satisfaction. See id. But by the same token,
regulatory oversight by the States is likewise intended and designed to
secure higher levels of servicer performance and to limit instances of
poor customer service and other abuses through different mechanisms and
channels. The same is true of the other example highlighted in the 2018
interpretation, which explains how the Department's formal complaint
process can help borrowers elevate customer service issues for
heightened attention and prompt resolution. See id. But as with the
Department itself, State regulators and State attorneys general have
staff members who are typically available to field and respond to
complaints. Here again, the cumulative force of combining these joint
efforts augments, rather than detracts from, the goal of improving
customer service.
The concept of ``cooperative federalism'' laid out here can and
should also lead to mutual efforts to make improvements in other areas
of student loan servicing that support greater access to higher
education. The core purpose of State laws and regulations overseeing
student loan servicers is to protect their citizens who are borrowers
of student loans and their families. The reason they took out those
loans in the first place was to secure the benefits of higher education
and to cope with the financial costs involved. Consideration of these
broader objectives reveals many opportunities for productive
cooperation that can be fruitfully pursued between Federal and State
officials who share these objectives and are interested in pursuing
them jointly. In short, an approach that is marked by Federal-State
cooperation is likely to secure better implementation of student aid
programs as well as better service to borrowers and their families. Out
of this cooperation may come a broader understanding of how these
mutual efforts can advance the central goal of facilitating affordable
access to higher education for students in every part of the country.
For these reasons, the Department issued the 2021 interpretation with
the explicit purpose of revoking and superseding the 2018
interpretation. Now, the Department confirms that this interpretation
supersedes prior statements by the Department that are not consistent
with this final interpretation.
Accessible Format: On request to the contact person listed under
FOR FURTHER INFORMATION CONTACT, individuals with disabilities can
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Electronic Access to This Document: The official version of this
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access the official edition of the Federal Register and the Code of
Federal Regulations via the Federal Digital System at <a href="http://www.govinfo.gov">www.govinfo.gov</a>.
At this site you can view the document, as well as all other documents
of this Department published in the Federal Register, in text or
Portable Document Format (PDF). To use PDF you must have Adobe Acrobat
Reader, which is available free at the site.
You may also access documents of the Department published in the
Federal Register by using the article search feature at
<a href="http://www.federalregister.gov">www.federalregister.gov</a>. Specifically, through the advanced search
feature at this site, you can limit your search to documents published
by the Department.
Miguel A. Cardona,
Secretary of Education.
[FR Doc. 2023-15436 Filed 7-21-23; 8:45 am]
BILLING CODE 4000-01-P
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