[Federal Register Volume 86, Number 153 (Thursday, August 12, 2021)]
[Rules and Regulations]
[Pages 44277-44282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17021]


=======================================================================
-----------------------------------------------------------------------

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: Interpretation.

-----------------------------------------------------------------------

SUMMARY: The U.S. Department of Education (Department) issues this 
interpretation to revise and clarify its 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 only in limited and discrete respects, as further 
discussed in this interpretation. In addition, this interpretation will 
help facilitate close coordination between the Department and its State 
partners to further enhance both servicer accountability and borrower 
protections. This interpretation revokes and supersedes the 
interpretation published on March 12, 2018, ``Federal Preemption and 
State Regulation of the Department of Education's Federal Student Loan 
Programs and Federal Student Loan Servicers'' (2018 interpretation).

DATES: This interpretation is effective on August 12, 2021. We must 
receive your comments on or before September 13, 2021.

ADDRESSES: Submit your comments through the Federal eRulemaking Portal 
or via postal mail, commercial delivery, or hand delivery. We will not 
accept comments submitted by fax or by email or those submitted after 
the comment period. To ensure that we do not receive duplicate copies, 
please submit your comments only once. In addition, please include the 
Docket ID at the top of your comments.
    <bullet> Federal eRulemaking Portal: Go to www.regulations.gov to 
submit your comments electronically. Information on using 
Regulations.gov, including instructions for accessing agency documents, 
submitting comments, and viewing the docket, is available on the site 
under FAQ.
    <bullet> Postal Mail, Commercial Delivery, or Hand Delivery: If you 
mail or deliver your comments about the interpretation, address them to 
Beth Grebeldinger, U.S. Department of Education, Federal Student Aid, 
830 First Street NE, Room 113F4, Washington, DC 20202.
    Privacy Note: The Department's policy is to make all comments 
received from members of the public available for public viewing in 
their entirety on the Federal eRulemaking Portal at 
www.regulations.gov. Therefore, commenters should be careful to include 
in their comments only information that they wish to make publicly 
available.

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#733116071b5d34011211161f171a1d1416013316175d141c05"><span class="__cf_email__" data-cfemail="e5a780918dcba29784878089818c8b828097a58081cb828a93">[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:
    Invitation to comment: We are inviting comment on this 
interpretation because we value the public's input and perspective on 
these critical issues. We will consider public comment received and 
determine whether it is appropriate to modify or supplement this 
document.
    Background: On March 12, 2018, the Department published in the 
Federal Register the 2018 interpretation (83 FR 10619). The 2018 
interpretation set forth the Department's position at the time on the 
legality of several State laws regulating Federal student loan 
servicers, which the Department found to be broadly preempted by 
Federal law. In particular, the 2018 interpretation opined that State 
regulation of the servicing of loans under the William D. Ford Federal 
Direct Loan Program (Direct Loans) ``impedes uniquely Federal 
interests.'' Id. at 10,620. The 2018 interpretation also opined that 
State regulation of the servicing of loans under the Federal Family 
Education Loan Program (FFEL Loans) ``is preempted to the extent that 
it undermines uniform administration of the program.'' Id.
    Federal courts have had the opportunity to consider the 
Department's position on preemption in several recent decisions. Those 
courts consistently declined to give any deference to the 2018 
interpretation, finding it deserving of ``little weight.'' Nelson v. 
Great Lakes Educ. Loan Services, Inc., 928 F.3d 639, 651 n.2 (7th Cir. 
2019); see also Lawson-Ross v. Great Lakes Higher Educ. Corp., 955 F.3d 
908, 921 n.13 (11th Cir. 2020) (same); New York v. Pennsylvania Higher 
Educ. Assistance Agency, 19 Civ. 9155, 2020 WL 2097640 at *16 n.14 
(S.D.N.Y. May 1, 2020) (same); Student Loan Servicing Alliance v. DC, 
351 F. Supp. 3d 26, 48-51 (D.D.C. 2018). Their analyses reveal the 
flaws in the 2018 interpretation's insubstantial justifications for its 
broad claims to preempt State laws on student loan servicing.
    The court in Student Loan Servicing Alliance analyzed the 2018 
interpretation in some detail, and its analysis has been largely 
followed by the other courts that have considered these preemption 
issues. The court found that the 2018 interpretation constitutes 
informal guidance, having not undergone any formal review process 
prescribed by statute. See 351 F. Supp. 3d at 48-49. Thus, under Wyeth 
v. Lavine, 555 U.S. 555 (2009), the 2018 interpretation would be 
entitled only to Skidmore deference, which turns on its ``thoroughness, 
consistency, and persuasiveness.'' Wyeth, 555 U.S. at 577. The court 
went on to find that the views expressed in the 2018 interpretation 
warrant no deference because they are conclusory

[[Page 44278]]

and devoid of analysis, offering nothing more than ``a retroactive, ex-
post rationalization for DOED's policy changes.'' Student Loan 
Servicing Alliance, 351 F. Supp. 3d at 50. Moreover, those views 
produce a ``dramatic inconsistency'' from explicit statements that the 
Department had made in prior judicial proceedings, and such a ``stark, 
unexplained change'' in the Department's approach to preemption again 
precluded any deference. Id. Finally, the 2018 interpretation was found 
to be neither thorough nor persuasive because it did not even specify 
the regulations that it claimed to be interpreting. See id. at 51.
    The Department has reconsidered the issues of preemption and the 
place of the States in regulating Federal student loan servicers and 
revokes the 2018 interpretation as substantially overbroad and legally 
unsupported. Preemption issues are necessarily contextual and fact-
specific, and the law does not support the sweeping claims made in the 
2018 interpretation that Federal law broadly preempts State authority 
over Federal student loan servicing under principles of field 
preemption, express preemption, or conflict preemption. The Department 
views the States as important partners in ensuring the protection of 
student loan borrowers and the proper servicing of Federal student 
loans. The Department believes that the States have an important role 
to play in this area and it is appropriate to pursue an approach marked 
by a spirit of cooperative federalism that provides for concurrent 
action according to a concerted joint strategy intentionally 
established among Federal and State officials. Accordingly, as 
discussed further below, the Department believes that there is 
significant space for State laws and regulations relating to student 
loan servicing, to the extent that these laws and regulations are not 
preempted by the Higher Education Act of 1965, as amended (HEA), and 
other applicable Federal laws. We will analyze and determine preemption 
issues consistent with this overarching principle but based on the 
specific, individualized facts and circumstances of a given situation.

A. General Preemption Principles

    As a preliminary matter, the Department recognizes that the Supreme 
Court has established the 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 narrowly construed and are to be resisted `` `unless 
that [is] 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 
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); Huron Portland Cement Co. v. Detroit, 
362 U.S. 440 (1960) (city may enforce its local anti-pollution 
ordinance even against Federally licensed steamship).
    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, and 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. Particularly ``in a 
field which the States have traditionally occupied,'' claims of 
preemption face a high hurdle that has been erected to preserve the 
traditional balance of powers under our system of federalism. Wyeth, 
555 U.S. at 565. One such area is education, long regarded as a subject 
for the exercise of predominantly State powers. Another 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 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, 955 F.3d at 923; see also 
Nelson, 928 F.3d at 652 (``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 and concludes 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 10621. 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.
    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

[[Page 44279]]

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, 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 10621. 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 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 
affirmative 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 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 misrepresentation about information 
that the servicer was not required to disclose. Nor can such conduct 
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 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 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 typically 
implement constitutional principles of federalism by seeking to balance 
and respect those mutual interests as much as possible. 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 
traditionally have understood their duty to harmonize Federal and State 
power to the greatest extent they can do so. Therefore, implied 
conflict preemption only nullifies 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; Lawson-Ross, 955 F.3d at 920-23; 
Nelson, 928 F.3d at 650-51.
    Courts have found conflict preemption to apply to State laws 
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

[[Page 44280]]

``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.

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 10620.
    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 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. See, e.g., 
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 prohibiting 
affirmative misrepresentations by student loan servicers, 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 10621. 
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 10620-21, are likewise unavailing. Reducing costs by making 
fraudulent or false statements to student loan borrowers 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 or false 
statements would save them money, to be sure, but it would be a 
breathtakingly broad assertion of preemption, given that even Federal 
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, dispute 
resolution procedures, and some particulars of debt collection and loan 
servicing. But here, too, the grounds for preemption of State laws are 
narrow and do not properly include any preemption of liability under 
State law for other matters, such as affirmative misrepresentations 
made to loan borrowers.
    In the past, the Department has 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 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 40120. More specifically, the Department explained that its 
regulations establish minimum collection actions required on all FFEL 
obligations, which preempted 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 describes some State laws as inconsistent 
with specific Federal measures. These include laws creating deadlines 
for servicers to respond to borrower inquiries or disputes; deadlines 
for notifying borrowers of loan transfers between servicers; 
requirements for dispute resolution procedures; and a

[[Page 44281]]

few other miscellaneous items. See 83 FR 10621-22. If these specific 
State laws are directly inconsistent with an equally specific Federal 
law, they are preempted.
    As with Direct Loans, however, 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 do not conflict 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, and improper 
conduct that may occur in the Federal student aid programs.

G. Enhanced Borrower Protections Through Federal-State Cooperation

    The final section of the 2018 interpretation cautions that broad 
preemption of State student loan servicer laws would not leave 
borrowers unprotected, and it elaborates 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 10622. In this interpretation, the Department 
reaffirms these important objectives and its determination to hold 
servicers accountable for failing to meet these standards and 
expectations. 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 perspective on 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, a different approach may be more likely to succeed: A coordinated 
partnership of interested Federal and State officials could 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 10622. 
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 taking the trouble to 
enact 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

[[Page 44282]]

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 is issuing this interpretation with 
the explicit purpose of revoking and superseding the 2018 
interpretation.
    Accessible Format: On request to the contact person listed under 
FOR FURTHER INFORMATION CONTACT, individuals with disabilities can 
obtain this document in an accessible format. The Department will 
provide the requestor with an accessible format that may include Rich 
Text Format (RTF) or text format (txt), a thumb drive, an MP3 file, 
braille, large print, audiotape, or compact disc, or other accessible 
format.
    Electronic Access to This Document: The official version of this 
document is the document published in the Federal Register. You may 
access the official edition of the Federal Register and the Code of 
Federal Regulations via the Federal Digital System at www.govinfo.gov. 
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 
www.federalregister.gov. Specifically, through the advanced search 
feature at this site, you can limit your search to documents published 
by the Department.

Miguel Cardona,
Secretary of Education.
[FR Doc. 2021-17021 Filed 8-11-21; 8:45 am]
BILLING CODE 4000-01-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>