Biden unleashes state regulators on student-loan abuses, reversing Trump-era policy

• The Education Dept. revised a Trump-era policy that preempted states from regulating student-loan companies.
• The new rule will allow states to better protect borrowers and hold servicers accountable.
• Advocacy groups applauded this move as a step toward better oversight of the student-loan system.

Under President Donald Trump, there was only one watchdog on the student-loan beat, and it was the federal government. President Joe Biden just changed that to give the states a stake in the matter.

On Monday, the Education Department announced in a press release that it had revised and clarified a position under Trump that preempted states from regulating student-loan companies. The new legal interpretation under Biden will help states enforce borrowers' bills of rights and other similar laws to address issues with servicing loans and will strengthen states' abilities to facilitate oversight of student-loan companies, which Education Secretary Miguel Cardona said will be "clarifying [for] the relationship between federal and state law on this issue."

The new interpretation will go into effect this week, and the public will have 30 days to submit comments on any additional changes that are needed.

"States have long played an integral role in higher education oversight and have been on the front lines of protecting student borrowers from fraud and abuse," Massachusetts Attorney General Maura Healey said in a statement. "We applaud Secretary Cardona for rejecting the previous interpretation that inaccurately represented the states' authority and emboldened bad actors."

Insider reported last month that all 50 states urged Cardona in a letter to rescind Trump-era policies that kept states out of student-loan regulation, with the Conference of State Bank Supervisors and the North American Collection Agency Regulatory Association calling Trump's 2018 notice "unwise and misguided."

In 2017, more than half of all 50 states either proposed or enacted legislation to regulate student-loan servicers. But Trump's Education Department changed that with a memo that said the Privacy Act of 1974 prevented student-loan servicers from supplying state regulators with any documentation unless the department approved. A 2018 notice from Trump's department followed, insulating student-loan servicers from any type of state regulation.

Following Cardona's announcement on Monday, a number of organizations that work to protect borrowers applauded the department's move. Student Defense, which works to advance students' rights to higher education, said this new notice "could lead to long-needed accountability and justice for students."

"We hope this move signals the Department of Education is moving quickly towards expanding accountability across student lending and better protecting student borrowers from being defrauded - especially during our recovery from the pandemic," Student Defense Vice President and Chief Counsel Dan Zibe said in a statement.

And the Student Borrower Protection Center Executive Director Seth Frotman said in a statement the new rule is ending "a years-long campaign by the student loan industry to obstruct justice - a scheme undertaken with the willing participation of the Trump Administration."

Massachusetts Sen. Elizabeth Warren has also been a leading lawmaker pushing for stricter oversight of student-loan companies, telling Insider last month that "the world has changed for student-loan-debt servicers" after two companies shut down their services in two weeks.