States Can Sue Federal Student Loan Servicers, Education Department Says

In its latest move to undo Trump-era policies, the Education Department said on Monday that states are free to police federal student loan servicers that run afoul of local consumer protection laws, reversing its previous legal stance.

“Effective collaboration among the states and federal government is the best way to ensure that student loan borrowers get the best possible service,” Education Secretary Miguel A. Cardona said in a statement announcing the change.

The federal government pays seven vendors to collect payments from nearly 43 million borrowers on $1.4 trillion in federal student loans. Government auditors and other watchdogs have repeatedly criticized the companies for shoddy practices and mistakes that they say have harmed struggling borrowers and raised the repayment costs for many people.

Multiple state attorneys general have sued federal loan servicers over their missteps. In 2018, Betsy DeVos, the education secretary under President Donald J. Trump, sought to block those lawsuits by arguing that only the federal government had the authority to oversee and punish its federal loan servicers.

Several federal judges viewed that stance skeptically. In at least four cases, federal district or appellate courts ruled against the department and found that states retained some enforcement rights over servicers’ actions toward their state’s residents.

The Education Department cited those rulings in new guidance explaining its reversal and said working collaboratively with the states instead of fighting them “could produce a more robust system of supervision and enforcement to monitor and improve performance under this far-flung system.”

Maura Healey, the attorney general of Massachusetts, praised the new stance. Her office sued, and later settled with, the government’s largest loan servicer over errors that she said had hobbled public service workers seeking to use a loan-forgiveness program. (That servicer, the Pennsylvania Higher Education Assistance Agency, known to most borrowers as FedLoan, plans to terminate its contract with the government at the end of this year.)

“States have long played an integral role in higher education oversight and have been on the front lines of protecting student borrowers from fraud and abuse,” Ms. Healey said. “My office looks forward to collaborating with the department to ensure servicer accountability and borrower rights.”