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Washington, DC, California, Connecticut, and Illinois were among the first states to pass legislation regulating the servicing of student loans. However, roughly a fifth of the states have passed or proposed similar measures regarding student loan servicing. State student loan servicing laws and regulations typically prohibit misrepresentations, omissions, and other unfair or deceptive acts or practices in the servicing of student loans, and may put in place certain requirements about the application of payments, responses to inquiries, and other aspects of servicing. The state statutes also require that certain student loan servicers obtain a license from the state – a requirement that led to a legal challenge in DC earlier this year.

In March 2018, the Education Department published an Interpretation in the Federal Register stating that, for federal student loan servicers, the Higher Education Act (HEA) preempts state statutes requiring licensure and regulation. Shortly thereafter, a student loan servicing-related trade association filed suit against DC and the applicable regulator, the Department of Securities, Insurance and Banking. The association argued that the DC statute's servicer licensing and fee provisions were preempted by the HEA. The association argued that the state licensing requirement interfered with the federal government's servicing and collection of large financial assets (student loans), and that the court should defer to the Education Department's Interpretation. Servicers of federal student loans, the association explained, are subject to Department regulations and oversight.

The district court did not defer to the Department's Interpretation, noting that the Department had taken an opposing view of the HEA's preemptive effect in the past, and did not justify the change in position through the Interpretation. However, the court ultimately found that the DC student loan servicer licensing requirement was preempted by the HEA as to certain loans owned by the federal government. The court reasoned that since the HEA gives to the federal government the responsibility of contracting with student loan services, a conflict between the Education Department and the DC agency regarding a particular servicer would present an obstacle to the requirements of the HEA.

The court's order prohibits DC from enforcing its student loan servicer licensing requirements as to servicers of federally owned student loans for which the Department has authorization to contract with servicers – including loans under the Federal Direct Loan Program (FDLP) and federally owned Federal Family Education Loan Program (FFELP) loans, reported to constitute roughly 80% of all federal student loans.

Given the number of student loans that would be exempt from the licensing requirement, it remains unclear what the overall effect of the court's decision will be on state regulation of student loan servicers. In September, 16 states, including New York and California, filed an amicus brief arguing that state-level regulation of student loan services is necessary and does not conflict with federal programs, suggesting that this issue may move beyond DC.