The Biden administration has brought federal student loan policies to the forefront with three key announcements in furtherance of the president’s broader progressive higher education agenda. In just the past week, the U.S. Department of Education (the Department) announced a final extension of the pause on student loan repayment, interest, and collections until January 31, 2022; released a new legal interpretation allowing individual states to regulate federal student loan servicers without being preempted by the Higher Education Act of 1965 (the HEA); and established a negotiated rulemaking (neg-reg) committee to rewrite regulations for the Public Service Loan Forgiveness (PSLF) program, income-contingent repayment plans, and borrower defense to repayment, among other issues.
Pause of Federal Student Loan Payments Extended Through January 2022
On August 6, 2021, the Department announced it will extend until January 31, 2022 the temporary freeze on federal student loan payments. The moratorium was originally implemented on March 13, 2020 to provide temporary relief to borrowers reeling from the effects of the pandemic and encourage economic recovery. Specifically, the pause suspended all mandatory student loan payments, set the federal student loan interest rate at 0%, and stopped collections on defaulted loans. If borrowers make payments during the pause, the full payment is automatically applied to the borrower’s principal once all interest accrued prior to March 13, 2020 and any fees (for defaulted loans) are paid.
This is the third—and final—extension of the relief, which was set to expire on September 30, 2021. Loan repayments will now resume on February 1, 2022. The Department plans to start notifying borrowers of the final extension and will release additional resources and information about how to plan for the restart.
New Interpretation of State Regulation of Federal Student Loan Servicers
On August 9, 2021, the Department released a new legal interpretation to revise and clarify its position on the legality of state laws and regulations applicable to federal student loan servicers, such as preventing unfair or deceptive practices, correcting misapplied payments, or addressing refusals to communicate with borrowers. The interpretation also establishes a renewed dedication to “cooperative federalism,” whereby states and the federal government undertake mutual efforts to make improvements to federal student loan servicing.
The new interpretation replaces a prior notice of interpretation issued under the Trump administration on March 12, 2018, which stated that the HEA broadly preempted state efforts to regulate federal student loan servicers. The 2018 interpretation argued that state regulation of the William D. Ford Federal Direct Loan program (Direct Loans) “impedes uniquely federal interests,” and the Federal Family Education Loan Program (FFEL Loans) “is preempted to the extent that it undermines uniform administration of the program.”
In light of recent case law that, according to the Department, “consistently declined to give any deference to the 2018 interpretation,” the Department now concludes that state laws are preempted by the HEA only in “limited and discrete respects” and that “there is significant space for state laws and regulations relating to student loan servicing.” The 2021 interpretation identifies several specific HEA provisions that expressly preempt certain areas of state law, including the application of state usury laws, state statutes of limitation, state-law defense of infancy, state wage garnishment laws, state laws on certain costs and charges, and state disclosure requirements.
The 2021 interpretation also acknowledges that state regulation of federal student loan servicers may be preempted by federal law if it impedes the federal government’s selection of federal contractors through the imposition of a licensing requirement, attempts to revoke a license granted by the federal government for purposes established under federal law, or creates a direct conflict that would make it impossible for an entity to comply with both federal and state law. However, state regulation may be permissible if it imposes reasonable, generally applicable conditions on servicers under the state’s police power exercised on behalf of its citizens. According to the Department’s interpretation, examples of potentially permissible state laws may include prohibiting affirmative misrepresentations by student loan servicers and adopting additional measures that protect borrowers but do not conflict with federal law, such as creating deadlines for servicers to respond to borrower inquiries or disputes, deadlines for notifying borrowers of loan transfers between servicers, and requirements for dispute resolution procedures.
The interpretation is effective on the date it is published in the Federal Register. The public will have 30 days to submit comments.
Student Loan Negotiated Rulemaking Begins in October
On August 10, 2021, the Department published a notice establishing a neg-reg committee that will meet virtually beginning in October to promulgate new regulations on nine topics. The Department typically develops proposed regulations without public input and then publishes them in the Federal Register for public comment. However, the HEA requires the Department to use neg-reg to develop regulations for federal student loan and aid programs authorized under Title IV of the HEA. Under neg-reg, the Department works in collaboration with representatives of the parties who will be affected significantly by the regulations. This is done through a series of meetings during which these representatives, referred to as negotiators, work with the Department to come to a consensus on the Department’s proposed regulations. These meetings are facilitated by a neutral third party.
The topics announced for negotiation include:
- Borrower defense to repayment
- Closed school discharges
- Discharges for borrowers with a total and permanent disability
- False certification discharges
- Income-contingent repayment
- Interest capitalization on federal student loans
- Mandatory pre-dispute arbitration and prohibition of class action lawsuits
- Pell Grant eligibility for prison education programs (in a subcommittee)
- Public Service Loan Forgiveness
A few measures aimed at holding institutions of higher education accountable for student outcomes or financial stability—such as the Gainful Employment rules, rules for for-profit conversions to nonprofits, and certification procedures for participating in Title IV programs—are not included in this round of neg-reg.
The Department is seeking nominations for negotiators to represent 16 constituent groups. To submit nominations for committee, subcommittee, or advisor spots, please email negregnominations@ed.gov. The Department will accept nominations until August 31, 2021.
The first negotiating session will run from October 4 through October 8, with subsequent meetings on November 1–5 and December 6–10. The subcommittee will meet between the full committee meetings. All sessions will be virtual and open to the public.
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For more information regarding the topics discussed in this alert, please reach out to Sarah B. Donovan, Doreen S. Martin, William R. Nordwind, or Brian M. Melnyk.