DEPARTMENT OF EDUCATION Of Education’s Federal Student .
This document is scheduled to be published in theFederal Register on 03/12/2018 and available online athttps://federalregister.gov/d/2018-04924, and on FDsys.gov4000-01-UDEPARTMENT OF EDUCATION34 CFR Chapter VIFederal Preemption and State Regulation of the Departmentof Education’s Federal Student Loan Programs and FederalStudent Loan ServicersAGENCY:Office of the Secretary, Department of Education.ACTION:Interpretation.SUMMARY:Recently, several States have enacted regulatoryregimes that impose new regulatory requirements onservicers of loans under the William D. Ford Federal DirectLoan Program (Direct Loan Program).States also imposedisclosure requirements on loan servicers with respect toloans made under title IV of the Higher Education Act of1965, as amended (HEA).Finally, State regulations impactFederal Family Education Loan (FFEL) Program servicing.The Department believes such regulation is preempted byFederal law.The Department issues this notice to clarifyfurther the Federal interests in this area.DATES: [insert date of publication in the FEDERALREGISTER].FOR FURTHER INFORMATION CONTACT:Kathleen Smith, DeputyChief Operating Officer, U.S. Department of Education,Federal Student Aid, 830 First Street, NE., Union Center1
Plaza, Washington, DC 20202-5453.4533 or via email:Telephone:(202) 377-ED.NoticeResponse@ed.gov.If you use a telecommunications device for the deaf(TDD) or a text telephone (TTY), call the Federal RelayService, toll free, at 1-800-877-8339.SUPPLEMENTARY INFORMATION:Congress created and expanded the Direct Loan Programwith the goal of simplifying the delivery of student loansto borrowers, eliminating borrower confusion, avoidingunnecessary costs to taxpayers, and creating a morestreamlined student loan program that could be managed moreeffectively at the Federal level.Recently, several States have enacted regulatoryregimes or applied existing State consumer protectionstatutes that undermine these goals by imposing newregulatory requirements on the Department’s Direct Loanservicers, including State licensure to service Federalstudent loans.State servicing laws are purportedly aimedonly at student loan servicers, but such regulation affectsthe “[o]bligations and rights of the United States underits contracts” with servicers and with student loanborrowers, the “relationship between a Federal agency andthe entity it regulates,” and the rights of the Federalgovernment related to federally held debt.2(Boyle v.
United Technologies Corp., 487 U.S. 500, 504-05 (1988);Buckman Co. v. Plaintiffs' Legal Comm., 531 U.S. 341, 347(2001); United States v. Victory Highway Vill., Inc., 662F.2d 488, 497 (8th Cir. 1981).)Accordingly, the servicingof Direct Loans is an area “involving uniquely Federalinterests” that must be “governed exclusively by Federallaw.”(Boyle, 487 U.S. at 504.)A. Interest of the United StatesRecently, the United States filed a Statement ofInterest in a lawsuit brought by the Commonwealth ofMassachusetts against a Department loan servicer allegingviolations of Massachusetts State law for allegedly unfairor deceptive acts related to the servicing of Federalstudent loans and administration of programs under the HEA.(Statement of Interest by the United States, Massachusettsv. Pennsylvania Higher Education Assistance Agency, d/b/ aFedLoan Servicing, No. 1784-CV-02682 (Mass. Super. Ct.,filed Jan. 8, 2018).)The United States explained thatMassachusetts is improperly seeking to impose requirementson the Department’s servicers that conflict with the HEA,Federal regulations, and Federal contracts that govern theFederal loan programs.Accordingly, Massachusetts’ claimsare preempted because the State has sought to proscribeconduct Federal law requires and to require conduct Federal3
law prohibits.We believe that attempts by other States toimpose similar requirements will create additionalconflicts with Federal law.This is not a new position.The United States haspreviously responded when State law has been utilized in away that conflicts with the operation and purposes of loanprograms the Department administers pursuant to the HEA .On October 1, 1990, the Department issued a notice of itsinterpretation of regulations governing the FFEL Program(then known as the Guaranteed Student Loan program) (55 FR40120) that prescribe the actions lenders and guarant yagencies must take to collect loans.The Departmentexplained its view that these regulations preempt State lawregarding the conduct of these loan collection activities.In 2009, the United States intervened in Chae v. SLMCorporation, 593 F.3d 936 (9th Cir. 2010), a case in whichplaintiffs sought to apply State consumer protection lawsto a FFEL Program loan servicer, to explain that the Statelaws on which the plaintiffs relied conflicted with Federallaw.(Brief of Plaintiff-Intervenor-Appellee, Chae v. SLMCorp., 593 F.3d 936 (9th Cir. 2010) (No. 08-56154).)TheNinth Circuit concluded, among other things, that theprecisely detailed provisions of the HEA “showcongressional intent that FFELP participants be held to4
clear, uniform standards.”(Chae, 593 F.3d at 944.)Thecourt held that State-law claims alleging misrepresentationwere preempted by the HEA’s express preemption of State-lawdisclosure requirements, and that other State-law claims“would create an obstacle to the achievement ofcongressional purposes” and were therefore barred byconflict preemption principles.(Id. at 950.)The Department issues this notice to clarify its viewthat State regulation of the servicing of Direct Loansimpedes uniquely Federal interests, and that Stateregulation of the servicing of the FFEL Program ispreempted to the extent that it undermines uniformadministration of the program.B. Direct Loan ProgramCongress created the Direct Loan Program as part ofthe Student Loan Reform Act of 1993 (Pub. L. 103-66).Under the program, the Federal government is the directlender to the borrower and is responsible for all aspectsof the lending process from loan origination throughrepayment, including the proper servicing and collection ofthe loan.In signing the Master Promissory Note for theloan, the borrower promises to repay the loan and anyapplicable interest and fees according to the terms and5
conditions outlined in the HEA, the Department’sregulations, and the Note.(20 U.S.C. 1087e.)Congress provided that the program would beadministered by the Department through student loanservicers, directing the Secretary to enter into contractsfor loan “servicing” and for “such other aspects of thedirect student loan program as the Secretary determines arenecessary to ensure the successful operation of theprogram.”(20 U.S.C. 1087f(b)(4).) The HEA directs theSecretary to award servicing contracts only to entities“which the Secretary determines are qualified to providesuch services” and “that have extensive and relevantexperience and demonstrated effectiveness.” (20 U.S.C.1087f(a)(2).) When procuring such services, the Departmentmust, with specific exceptions, abide by “all applicableFederal procurement laws and regulations,” which includethe Federal Acquisition Regulation (FAR).(20 U.S.C.1087f(a), 1018a.) To achieve its goals of streamlining andsimplifying the delivery of student loans and of savingtaxpayer dollars (See 139 Cong. Rec. S5585, S5628 (1993)),Congress designed a program in which servicing would be“provided at competitive prices” by entities “selected byand responsible to the Department of Education.”(20U.S.C. 1087f(a)(1); H.R. Rep. No. 103-111, at 107 (1993).)6
The HEA and the Department’s regulations providecomprehensive rules governing the Direct Loan Program, andthe Department’s contracts with loan servicers furtherspecify the program’s rules and requirements.As theUnited States recently noted in the Statement of Interestin Massachusetts v. Pennsylvania Higher EducationAssistance Authority, “The Department’s contract with [theloan servicer] is voluminous--spanning more than 600 pagesand including provisions governing [the servicer’s]financial controls, internal monitoring, communicationswith borrowers, and many other topics.”Interest at 5.)(Statement ofIn its contracts with loan servicers,including task orders and change requests issued underthose contracts, the Department specifies in detail theresponsibilities and obligations of the servicers forDirect Loans and the benefits provided under that programsuch as Public Service Loan Forgiveness and income-drivenrepayment plans.Recently, States have sought to impose requirements onservicers that conflict with Federal statutes, Departmentregulations, and these comprehensive contracts.Mostnotable are State regulations requiring licensure of DirectLoan servicers in order to perform work for the Federalgovernment.“A State may not enforce licensing7
requirements which, though valid in the absence of federalregulation, give ‘the State’s licensing board a virtualpower of review over the federal determination’ that aperson or agency is qualified and entitled to performcertain functions, or which impose upon the performance ofactivity sanctioned by federal license additionalconditions not contemplated by Congress.” (Sperry v.Florida, 373 U.S. 379, 385 (1963) (quoting Leslie MillerInc. v. Arkansas, 352 U.S. 187, 190 (1956)) (footnotesomitted).)Such licensing requirements “interfere[] with thefederal government’s power to select contractors” and todetermine whether contractors are “responsible” underFederal law. (Gartrell Const. Inc. v. Aubry, 940 F.2d 437,438 (9th Cir. 1991).)With regard to responsibilitydeterminations of prospective contract awardees, theDepartment follows FAR Subpart 9.1 (48 CFR 9.100 through9.108-5).The Department selects contractors for DirectLoan servicing under 20 U.S.C. 1087f and 1018a.State-imposed registration and licensure requirements conflictwith these Federal authorities by adding to Federalrequirements and are thus preempted.(See United States v.Virginia, 139 F.3d 984, 989 (4th Cir. 1998).)8
For example, a State may purport to require a DirectLoan servicer, as a condition of licensure, to demonstratethat it has adopted certain business standards set by theState regulator; to meet certain financial responsibilityrequirements such as liquidity, financial solvency,capitalization, and surety bond requirements; and to submitto investigations, audits, and background checks by Stateauthorities.Federal law addresses standards ofresponsibility for prospective contractors, and a State maynot, “through its licensing requirements, review thefederal government's responsibility determination.”(Gartrell, 940 F.2d at 439.)Some State servicing laws also purport to imposeregulatory requirements on servicing that create additionalconflicts with Federal law.For example, some State lawsimpose deadlines on servicers for responding to borrowerinquiries and require specific procedures to resolveborrower disputes.Such laws establish deadlines forcompleting transfers of loans from one servicer to anotherand specific protocols for applying overpayments on loans.These are matters specified in the laws and regulationsgoverning the Direct Loan Program as well as thecontractual arrangements between the Department and theservicer.The Department has enforcement authority to9
oversee servicer compliance with these requirements, and“this authority is used by the [Department] to achieve asomewhat delicate balance of statutory objectives.”(Buckman Co. v. Plaintiffs’ Legal Committee, 531 U.S. 341,348 (2001).)The interposition of State-law requirementsmay conflict with legal, regulatory, and contractualrequirements, and may skew the balance the Department hassought in calibrating its enforcement decisions to theobjectives of the program.State servicing laws also may undermine Congress’sgoal of saving taxpayer dollars in administering the DirectLoan Program.Some State laws purport to impose licensingfees, assessments, minimum net worth requirements, suretybonds, data disclosure requirements, and annual reportingrequirements on the Department’s servicers that willincrease the costs of student loan servicing, perhapsexceeding the amount a servicer receives on a per loanbasis under its contract with the Department, and certainlydistorting the balance the Department has sought to achievebetween costs to servicers and taxpayers and the benefitsof services delivered to borrowers.Additionally, whereState servicing laws go beyond the requirements of Federallaw in restricting the actions a servicer may take tocollect on a loan, such laws impede the ability of the10
Department to protect Federal taxpayers by ensuring therepayment of Federal loans.The Department’s contractsrequire servicers to operate throughout the United Statesbecause loan borrowers are in all States.A servicer doesnot have the choice to refrain from operating in aparticular State to avoid licensing fees and other costsimposed by the State.Rather, the States are using theservicers’ compliance with Federal law and contracts toextract payments that benefit the State at the expense ofthe Federal taxpayer.A requirement that Federal student loan servicerscomply with 50 different State-level regulatory regimeswould significantly undermine the purpose of the DirectLoan Program to establish a uniform, streamlined, andsimplified lending program managed at the Federal level.As courts have recognized, Congress provided “a clearcommand for uniformity” in the HEA with respect to the FFELProgram, and then “created a policy of inter-programuniformity by requiring that ‘loans made to borrowers[under the Direct Loan Program] shall have the same terms,conditions, and benefits, and be available in the sameamounts, as loans made to borrowers under [the FFELProgram].’”(Chae, 593 F.3d at 945 (quoting 20 U.S.C.1087e(a)(1)).)Indeed, “Congress’s instructions to the11
[Department] on how to implement the student-loan statutescarry this unmistakable command:that will apply across the board.”Establish a set of rules(Id.)State regulatoryregimes conflict with this congressional objective.Uniformity not only reduces costs but also helps toensure that borrowers are treated equitably and are notconfused about the lending and repayment process.State-level regulation subjects borrowers to different loanservicing deadlines and processes depending on where theborrower happens to live, and at what point in time.These conflicts with statutes, regulations, Federalcontracts, and congressional objectives suggest that Stateregulation of loan servicers would be preempted by Federallaw.That result is even more evident where, as in theDirect Loan Program, State regulation implicates uniquelyFederal interests.As the Supreme Court has recognized,“obligations to and rights of the United States under itscontracts are governed exclusively by Federal law,” andthis area of Federal concern extends to “liability to thirdpersons” that “arises out of performance of the contract.”(Boyle v. United Technologies Corp., 487 U.S. 500, 504-05(1988).)Here, there is no question that the “imposition ofliability on Government contractors will directly affectthe terms of Government contracts,” at the very least by12
raising the price of such contracts, and “the interests ofthe United States will be directly affected.”(Id. at507.)Moreover, “the civil liability of Federal officialsfor actions taken in the course of their duty” is anotherarea “of peculiarly Federal concern, warranting thedisplacement of State law.”(Id. at 505.)This areaextends to the liability of contractors performing theirobligations under contracts with the Federal governmentbecause “there is obviously implicated the same interest ingetting the Government’s work done.”(Id.)Here, the loanservicers are acting pursuant to a contract with theFederal government, and the servicers stand in the shoes ofthe Federal government in performing required actions underthe Direct Loan Program.“[W]here the Federal interest requires a uniform rule,the entire body of State law applicable to the areaconflicts and is replaced by Federal rules.”(Id. at 508.)The disposition of federally held debt such as governmentissued loans is a Federal interest that requires uniformitybecause State intervention harms the Federal fisc.11See, e.g., United States v. Scholnick, 606 F.2d 160, 164 (6th Cir.1979) (holding that “in any consideration of remedies available upondefault of a Federally held or insured loan, Federal interestpredominates over State interest” because of “an overriding Federal13
Accordingly, the Department believes that the statutory andregulatory provisions and contracts governing the DirectLoan Program preclude State regulation, either of borrowersor servicers.C. Prohibited Disclosure RequirementsCongress has provided that “[l]oans made, insured, orguaranteed pursuant to a program authorized by title IV ofthe [HEA] shall not be subject to any disclosurerequirements of any State law.” (20 U.S.C. 1098g.)As aFederal district court recently explained, “Congressintended [section] 1098g to preempt any State law requiringlenders to reveal facts or information not required byFederal law.”(Nelson v. Great Lakes Educ. Loan Servs.,No. 3:17-CV-183, 2017 WL 6501919, at *4 (S.D. Ill., Dec.19, 2017).)Federal law provides a carefully crafteddisclosure regime specifying what information must beprovided in the context of the Federal loan programs.(See, e.g., 20 U.S.C. 1078-3(b)(1)(F); 1083(e)(1) and (2);34 CFR668.41(b);674.42; 674.31; and 682.205.)TheDepartment interprets “disclosure requirements” underinterest in protecting the funds of the United States and in securingFederal investments”); United States v. Wells, 403 F.2d 596, 597-98(5th Cir. 1968) (“The national loan program of the VeteransAdministration cannot be subjected to the vagaries of the various Statelaws which might otherwise control all or some phases of the loanprogram.”).14
section 1098g of the HEA to encompass informal or nonwritten communications to borrowers as well as reporting tothird parties such as credit reporting bureaus.The United States previously addressed the scope ofsection 1098g in its submission to the Ninth Circuit inChae.A State-law claim based on “a purported failure ofdisclosure runs headlong into express statutory preemptionprovisions,” according to the United States; “[s]uchadditional requirements are barred whether they are enactedlegislatively or implied judicially in the context of atort suit.”11.)(Brief of Plaintiff-Intervenor-Appellee atIn Chae, the court held that State-law claimsalleging misrepresentation by a student loan servicer were“improper-disclosure claims” and, therefore, preemptedpursuant to section 1098g.(Chae, 593 F.3d at 942.)Thecourt found the “allegations in substance to be a challengeto the allegedly-misleading method [the servicer] used tocommunicate with the plaintiffs about its practices.” (Id.at 942-43.)As the court explained, “the State-lawprohibition on misrepresenting a business practice ‘ismerely the converse’ of a State-law requirement thatalternate disclosures be made.”(Id. at 943 (quotingCipollone v. Liggett Grp., 505 U.S. 504, 517 (1992)).)15
To the extent that State servicing laws attempt toimpose new prohibitions on misrepresentation or theomission of material information, those laws would also runafoul of the express preemption provision in 20 U.S.C.1098g.D. FFEL Program LoansThe HEA and Department regulations governing the FFELProgram preempt State servicing laws that conflict with, orimpede the uniform administration of, the program.Statelaws that require FFEL Program servicers to respond to aborrower’s inquiry or dispute within a certain period oftime, for example, conflict with the applicable Federalregulation that allows servicers 30 days after receipt torespond to any inquiry from a borrower.682.208(c).)(34 CFRDeadlines for notifying borrowers of loantransfers between servicers similarly conflict with Federalstatutes and regulations
loans made under title IV of the Higher Education Act of 1965, as amended (HEA). Finally, State regulations impact Federal Family Education Loan (FFEL) Program servicing. The Department believes such regulation is preempted by Federal law. The Department issues this notice to clarify further the Federal interests in this area.
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HIGHER EDUCATION DEPARTMENT HANDBOOK 2021-2022 Page 7 . improvement and success. Higher Education Department Policies, Resources, and Expectations . Higher Education Department Grade Requirements . Credits carrying below a grade of "B-" will not be accepted by the Department as meeting degree requirements.
