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Department of Education blocks states on student loan debt collectors

Department of Education blocks states on student loan debt collectors
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Education Secretary Betsy DeVos has a message for Massachusetts Attorney General Maura Healey and officials in other states hoping to rein in student loan debt collectors: Back off.

The US Department of Education announced on Friday that it considers state efforts to regulate collection companies — many of which have been accused of unfair consumer practices – inappropriate and that they “undermine” federal authority.

The notice from the education agency and DeVos infuriated consumer advocates and Healey, who called it a move to protect debt collectors at the expense of student loan borrowers across the country.

“Secretary DeVos can write as many love letters to the loan servicing industry as she wants,” Healey said in a statement. “The last thing we need is to give this industry a free pass while millions of students cannot afford to pay their loans.”

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The federal education agency in particular singled out Healey’s ongoing lawsuit against the Pennsylvania Higher Education Assistance Agency as an example of state officials overstepping their authority. The federal government has stepped in on behalf of the debt servicer in this state case.

Healey has alleged that the servicer, which does business as FedLoan Servicing, violated state and federal laws by causing teachers and others to lose benefits and financial help under the Public Service Loan Forgiveness program. Under the program, students can have loans forgiven after 10 years of public service, a benefit designed to encourage graduates to take jobs in government and nonprofits.

Legislators in other states have also adopted new laws requiring these loan collection companies to get state licenses, meet certain business standards, and comply with investigations launched by state authorities.

These new state requirements, “may conflict with legal, regulatory and contractual requirements, and may skew the balance the department has sought in calibrating its enforcement decisions to the objectives of the program,” the Department of Education said in its notice.

They may also cost taxpayers more money by piling on regulations onto these companies, who are likely to pass on the cost to the education department, DeVos said.

The Department of Education, which has issued more than $1 trillion of the $1.4 trillion in student loan debt owed by Americans, hires companies such as FedLoan Servicing and Navient to collect payments.

Federal and state investigations have found significant problems in the collection practices and education department oversight.

For example, an investigation by states and the Consumer Financial Protection Bureau found that Navient encouraged struggling consumers into a short-term forbearance program that required less paperwork for the company, but meant that borrowers who postponed payments accrued more interest on their debt. Many of these borrowers could have instead qualified for the income-driven repayment plan, which would have lowered their monthly bill and put them on a potential path for loan forgiveness.

Authorities found that Navient offered its employees incentives to get borrowers into forbearance plans, a move that allowed the company to collect $4 billion in interest charges over five years. Navient has denied any wrongdoing, but several states have also sued the company.

The education department, which contracts with these companies, hasn’t always been the best enforcer of consumer laws, said Persis Yu, a staff attorney at the National Consumer Law Center, a Boston-based organization that operates a borrower assistance project.

“People have lost years in their payments and they will be paying thousands of dollars more because of the delays and the errors made by these companies,” Yu said. “Having more cops on the beat to look out for student loan borrowers the better.”

Healey said her office plans to continue its investigations into student loan collection companies, but consumer groups worry that state authorities may be discouraged by the additional hurdle put in place by the education department’s notice that federal authority trumps state guidelines.

Deirdre Fernandes can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe.



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