The Education Department (ED) is throwing out Trump-era guidance that blocked state consumer protection agencies from obtaining data about student debtors from student loan servicers.

“We are really committed to the idea of a collaborative approach to oversight of the student loan program,” a department official told Yahoo Finance. “We believe that states are really strong partners there.”

If a state attorney general or a regulatory body wants to examine records such as customer complaints or company handbooks to see if a student loan servicing company or a debt collector is violating a law or regulation, under this new guidance, they’d be able to access them.

“This is a really big deal,” Seth Frotman, executive director of the D.C.-based Student Borrower Protection Center told Yahoo Finance. “Under the DeVos administration, they used every trick and trap they could take to try and stop these efforts to bring accountability to the student loan industry.”

U.S. Secretary of Education Miguel Cardona takes part in a briefing at the White House in Washington, U.S., March 17, 2021. REUTERS/Leah Millis

U.S. Secretary of Education Miguel Cardona takes part in a briefing at the White House in Washington, U.S., March 17, 2021. REUTERS/Leah Millis

Frotman further described the guidance “as a critical first step in terms of turning the tide and ensuring that borrowers are better protected in the market.”

With the ability to obtain the information, state agencies will be able to investigate possible misconduct and violations of state consumer protection laws.

“It’s time for us to be a partner, not a roadblock,” Richard Cordray, who heads Federal Student Aid at ED, said in a blog post published on Friday. “[The federal government] should be spending our time partnering with state agencies to effectively oversee our loan servicers and debt collectors.”

States play a big role in oversight

Although states play a big role in consumer protection, they’ve hitherto been routinely rebuffed when submitting such requests under Education Secretary Betsy DeVos. 

Many states — such as Colorado this week — have had to file lawsuits against loan servicers to get information. The ED official noted that Colorado’s request for data has since been granted, so the loan servicer will have to turn the documents over to the attorney general (AG).

The old memo “was in some ways used as a shield [against] requests from state AGs or banking regulators who were looking for information about the practices of federal student loan servicers,” the ED official said. “And in that sense it was a real barrier to state level, oversight of the federal student loan program.”

States have enacted specific laws regarding student loan servicing in the past but were previously unable to monitor and oversee student loan servicers to screen for instances where borrowers were harmed.

In March, eleven consumer protection agencies from California to New York asked current Secretary Miguel Cardona to reverse the DeVos-era rules, calling them “misguided and unsound.” 

“We strongly applaud these efforts, which will help us better protect California borrowers and discontinue a practice that allowed companies to shield themselves from proper regulation and oversight,” California Department of Financial Protection & Innovation Commissioner Manuel P. Alvarez, who sent the original letter criticizing the Trump-era rules, told Yahoo Finance.

“The message is clear today,” Frotman said, “that no longer can the student loan industry try to shield itself from oversight and accountability for its lawless practices.”

Student loan balances increased by $29 billion to $1.58 trillion in the first quarter, according to the New York Fed. At the same time, only 6.2{06d6670df80e02c0b1a51bdfaefb71b6e69ecb50fe99d893294764e2911a48c2} of student loans were in serious delinquency or default in the first quarter of 2021 due to the payment pause and debt collection moratorium.

(Source: New York Fed)

(Source: New York Fed)

The timing is also relevant: States will regain oversight over how servicers interact with borrowers before the pandemic-related payment pause on federal student loans is set to expire in October, which could lead to a spike in defaults.

State oversight will likely focus on examining how servicers offer repayment plans, walk borrowers through their Public Service Loan Forgiveness applications, and advise debtors who are unable to make payments in the months after. This could prevent delinquencies from spiking.

Confusion over paperwork and payments is a big reason why both those loan forgiveness programs have had such “abysmal” success rates, according to a recent National Consumer Law Center report.

Thirteen states, from California and Rhode Island, have passed a ‘Student Borrower Bill of Rights’ to better address the ongoing student debt crisis. Three more states, Minnesota, North Carolina, and Nevada, are actively considering this legislation.

Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected] Follow her on Twitter @aarthiswami.

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