Federal Preemption and Joint Federal-State Regulation and Oversight of the Department of Education's Federal Student Loan Programs and Federal Student Loan Servicers, 47370-47375 [2023-15436]

Agencies

• DEPARTMENT OF EDUCATION

[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 [www.gpo.gov]
[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: 
[email protected]. 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.
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Miguel A. Cardona,
Secretary of Education.
[FR Doc. 2023-15436 Filed 7-21-23; 8:45 am]
BILLING CODE 4000-01-P