UC Irvine Law Review

A “triad” of regulators is supposed to ensure that student loan borrowers are not harmed by low-value institutions of higher education, including exploitative profiteers operating fly-by-night or predatory institutions of higher education. The triad has failed. Millions of students have borrowed billions of federal student loan dollars that they won’t ever repay, causing borrowers to suffer needless economic harm and psychological anguish. But these harms were, are, and remain mostly preventable. This Article appears to be the first law review article to consider the states’ role in policing institutional quality and ensuring that student borrowers are not preyed upon by low-value institutions of higher education. It suggests concrete steps states could take, such as adopting a state version of financial responsibility scores, the gainful employment rule, or a cohort default rate metric, to avoid being characterized as the forgotten stewards of higher education quality.

Private student loan borrowers arguably have the fewest protections of any users of credit in the United States. In a scarcely debated amendment to federal bankruptcy law in 2005, private student lenders gained the same protections against discharge previously afforded to federal student lenders. Yet private student loan borrowers received none of the rights available to federal student loan borrowers. These include income-driven repayment, relief from repayment on disability, loan discharge for fraud or closed schools, and public service loan forgiveness. Private student loan borrowers thus have neither the bankruptcy protections afforded to nonstudent loan debtors nor the repayment and debt relief rights of student borrowers under the federal loan program.

This lack of consumer protection has particular consequence when considering the plight of for-profit school students saddled with private student loans. Some of the worst abuses in the proliferation of higher education debt have been perpetrated against for-profit school attendees. The vast majority of private student loans are cosigned, typically by older family members. This combination of private student loans and for-profit school attendance impacts a much broader range of consumers than would a comparable number of federal student loans.

We suggest two types of state legislation to protect these debtors. For prospective for-profit school private borrowers, we propose incorporating some of the protections of federal student loans through the use of a state equivalent to the Federal Trade Commission “Holder Rule.” For all private student loans, we propose a requirement that private lenders engage in a mandatory settlement process, similar to those used by states during the recent foreclosure crisis, as a prerequisite to using state courts for debt collection.

Masquerading as legitimate help are companies that target forty-four million borrowers owing over $1.6 trillion in student loan debt. “Relief” companies purport to help borrowers struggling to repay student loans but, in fact, inflict irreversible financial harm by charging borrowers unlawful fees. Often pretending to be affiliated with the U.S. Department of Education (Education Department), relief companies falsely claim they can enroll borrowers into income-driven repayment plans and forgiveness programs. Exploiting twenty-first century technologies, relief companies can now easily reach millions of borrowers by, for example, making robocalls to cellphones, posting phony five-star reviews on social media, and requiring borrowers to e-sign documents disclosing their financial information. One company alone bilked student loan borrowers out of thirty-five million dollars in unlawful fees for bogus relief.

This Article addresses the federal response to widespread fraud by relief companies. Borrowers can theoretically obtain free help from private companies called “loan servicers,” which are authorized by the Education Department to assist borrowers with repayment options. However, under new leadership since 2017, the Education Department has taken steps to shield loan servicers from being held accountable for alleged unlawful servicing practices. Similarly, the Bureau of Consumer Financial Protection (CFPB) has implemented several harmful changes, including closing the only federal office dedicated to assisting student loan borrowers. In light of harmful actions taken by the CFPB and the Education Department, this Article proposes that states establish ombudsmen to effectively advocate for borrowers and eliminate their susceptibility to relief companies falsely promising to help. This Article also proposes that Congress require the Education Department to implement existing technology-based solutions to prevent relief companies from taking over borrowers’ online loan accounts to conceal their fraudulent activities.

Student loan collection hearings should be the primary gateway to relief for borrowers in default, but the system is profoundly broken. The author presents case examples, available data, and responses from industry surveys to describe how student loan collection hearings offer no more than an illusion of due process. The later sections present reform proposals to improve the existing hearing system, including eliminating private contractor outsourcing and increasing government accountability and oversight. Recognizing that it is counterproductive to try to fix the hearing process without tackling systemic issues, the final section includes a summary of broad reform measures aimed at ending the current debt-fueled federal student aid system.

This Article unpacks three doctrinal puzzles at the intersection of federalism and federal contracting, using student loan law as its anchoring case study. Currently, more than $1 trillion of federal student loan debt is serviced by private financial institutions under contract with the Department of Education. These loan servicers have allegedly engaged in systemic consumer abuses but are seldom held accountable by the federal government. To bridge the accountability gap, several states have recently passed “Student Borrower Bills of Rights.” These state laws include provisions to regulate the student loan servicing industry, including the Department’s federal contractors. States undoubtedly have legitimate interests to protect their residents, communities, and local economies against industry malfeasance. The overarching question, however, is whether federal law prohibits states from performing this remedial function. This Article offers a fresh look at three doctrinal puzzles at the heart of that debate. The first puzzle is whether the federal government’s constitutional immunity extends to shield federal contractors from generally applicable state laws. The second puzzle is whether federal procurement laws preempt state licensing of federal contractors. The third puzzle is whether federal contracts that expressly incorporate state law can save state law from preemption. Individually and collectively, how these puzzles are resolved may have far-reaching implications—not only for the future of student loan law, but also for federalism and federal contracting more generally.

If a future administration were to adopt sweeping student loan forgiveness, the contract state may stand in the way of actual debt cancellation. In the likely event that Congress were to adopt something short of universal and immediate student loan forgiveness, the Public Service Loan Forgiveness (PSLF) experience teaches us that the federal bureaucracy is unlikely to deliver fully on the legislative promise. In the first two years of the PSLF program, nearly 100,000 student loan borrowers have applied, and the Department of Education’s contractor has denied roughly 99,000 of those applications. The Department blames Congress for an unduly complex program design and borrowers for applying without understanding the eligibility rules. Given that PSLF has only four basic eligibility tests and that applicants are college graduates who can presumably read and count, this narrative seems implausible to explain a ninety-nine percent denial rate. Evidence from oversight agency reports, state attorney general and class action lawsuits, and thousands of borrower complaints logged by the Consumer Financial Protection Bureau tell a different story—a story of agency failure to implement and oversee the program, and of widespread contractor errors and misrepresentations. This Article explores the PSLF failure in detail, as an exemplar of the dysfunction of the contract state. I describe the legislative goals motivating student loan forgiveness and the contract architecture of the state-servicer relationship that administers a multibillion-dollar government loan repayment and cancellation program. I then evaluate the political and legal accountability for failure, and the promise and perils of the contract state.