California joins 11 other states seeking to end conflicted relationship with Department of Education
During the Trump administration, the Department of Education (ED) and state regulators developed an icy relationship. For those who like to think of it in terms of pop culture, the connection has been more Taylor / Kanye and less Simon / Daphne.
On March 9, 2021, in an effort to bridge the gap between states and ED, the California Department of Financial Protection and Innovation (DFPI) joined eleven other states in one letter sent to newly confirmed Education Secretary Miguel Cardona. The letter, written by the New York State Department of Financial Services (DFS), congratulated Cardona on his confirmation and called on him to partner with states in their efforts to protect student loan borrowers. . In addition to DFPI Commissioner P. Alvarez’s handbook, regulators in Colorado, Connecticut, Illinois, Maine, Massachusetts, New Jersey, Rhode Island, Washington and Wisconsin added their signatures.
In the letter, regulators called on ED to reverse certain policies described as “harmful”, “unhealthy” and which “undermine the oversight of private companies that administer federal student loans.” Concretely, the regulators asked ED to reverse (1) federal pre-emption of state oversight of student loan managers; and (2) the use of the Privacy Act of 1974 to prevent state regulators from obtaining documents and other documents, including lending service practices, that are necessary to industry surveillance.
Why are states pushing ED to abandon these policies?
According to the letter of March 9, “[ED] is the leading issuer of student loans in the country [and] contracts with private companies to service about $ 1.56 trillion in outstanding federal debt for student loans. There are 43 million student loan borrowers across the country, and student loan debt is the second largest category of consumer debt behind mortgages. These loans are all managed by private companies, which are often the borrower’s only interlocutor for the management of his loans.
The letter indicates,
“State oversight of student loan managers typically focuses on management practices, not the nature of the underlying loans, which may have been created under a federal program or by a private lender. These service practices include, however, the execution of certain programs that are unique to federal student loans, such as income-tested repayment plans and the forgiveness of public service loans – areas critical for documented malpractice. . As the dedicated and often single point of contact for borrowers for their student loans, both federal and private, the reluctance or inability of agents to provide accurate and relevant information to individual borrowers and guide them to the most appropriate repayment options. more profitable can have disastrous effects with few possibilities of recourse. States are well placed to oversee this industry, but our ability to do so suffers without federal allies. “
In response to illegal industry practices documented by the New York Times in 2017, many states, including California, have enacted student loan debt monitoring legislation to protect consumers from damage. However, the political positions of former Secretary DeVos completely halted attempts by states to gain visibility into the practices of student loan managers, leaving regulators in the dark.
“In recent years, California has worked to fill a void left by the federal government by protecting student loan borrowers from predatory practices.” DFPI Commissioner Alvarez said, “With Secretary Cardona’s confirmation, we look forward to working again with federal partners to protect California borrowers and help ease the current student loan debt crisis. “
insideARM point of view
Two of the many complications involved in effectively monitoring a $ 1.56 trillion portfolio are that multiple technology platforms are involved and there are dozens of loan programs out there, all with technical eligibility requirements and specific processes. Accordingly, in 2017 ED initiated a project to develop a NextGen program, including a complete overhaul of technology, processes and entrepreneurs. The program had an extremely tight schedule that would be difficult to meet even for the largest private company. Progress has been made, but there was changes in key management (including, of course, all the way up) and the procurement disputes which surely caused delays.
As for the relationship between regulators, now that the Biden administration has taken the reins and Secretary Cardona has been confirmed, it wouldn’t be surprising to see a more symbiotic relationship develop. Moreover, if Rohit Chopra, President Biden’s candidate for CFPB director and former CFPB student loans ombudsman, were to be confirmed, it is no exaggeration to imagine a scenario in which he would lend a hand.