Biden's Education Department just finalized a rule allowing states to protect student-loan borrowers from 'unfair and deceptive practices,' reversing the Trump administration's efforts

• The Education Department finalized a rule to allow state oversight into federal student-loan servicers.
• It reverses efforts from Trump's administration to prevent states from stepping in.

President Joe Biden's Education Department just finalized a rule allowing states to step it when student-loan companies engage in bad behavior.

On Monday, Education Secretary Miguel Cardona issued the final rule of a policy he first announced in 2021 that would allow states to regulate student-loan companies that manage federal loans. In 2018, former President Donald Trump's Education Secretary Betsy DeVos released a notice that only the federal government — not states — had the power to oversee federal loan servicers after some states had enacted rules that would allow them to regulate servicers.

"The Department issues this notice to clarify its view that State regulation of the servicing of Direct Loans impedes uniquely Federal interests," DeVos' department said at the time.

However, Cardona's notice in the Federal Register does the opposite of what DeVos intended. It "revises and clarifies the Department's position on the legality of State laws and regulations that govern various aspects of the servicing of Federal student loans, such as preventing unfair or deceptive practices, correcting misapplied payments, or addressing refusals to communicate with borrowers," it said.

The department concluded that the Higher Education Act of 1965 allows states to play a role in regulating federal loan servicers to better protect borrowers from misleading behavior.

"States may consider and adopt additional measures which protect borrowers and can be harmonized with Federal law," it said. "These measures can be enforced by the States, and the Department can and will work with State officials to root out all forms of fraud, falsehood, improper conduct, and other harms to borrowers that may occur in the Federal student aid programs."

In 2021, Cardona's opinion on the rule said that "the Department believes that there is significant space for State laws and regulations relating to student loan servicing, to the extent that these laws and regulations are not preempted by the Higher Education Act of 1965, as amended (HEA), and other applicable Federal laws."

The notice does have some limits on what states can do, like ruling a federal loan servicer in a state cannot continue operations. The Education Department recently signed contracts with five student-loan companies to service over 37 million borrowers with federal student loans, and those contracts included enhanced consumer-protection rules to protect borrowers from predatory behavior and allow states to intervene.

And it comes at a critical time for millions of borrowers who will resume repayment in October after over three-years on pause. After the Supreme Court struck down Biden's broad plan to cancel up to $20,000 in student debt for federal borrowers, the Education Department confirmed payments are still resuming in October, with interest beginning to accrue again in September — and it said it would work with servicers to ensure a smooth transition back into repayment.

"We understand that your life may have changed since the last time you made a student loan payment, or this may be your very first time making a payment," the department said in an email to borrowers on Sunday. "We are here to provide support and resources to you as you prepare for payments to resume, so you can identify the needs of your unique financial situation."