The U.S. Department of Education has announced that federal student loan collections will resume on May 5, ending a long pandemic-era pause. This includes the reinstatement of wage garnishments and other collection measures for defaulted borrowers. For professionals in the debt collection industry, this development carries important implications. Any organization involved in the recovery of federal student loans should take this time to evaluate its compliance posture, particularly around licensing.
State-Level Licensing
Over the past few years, state laws have evolved to impose more specific obligations on those who service or collect on student loans. In addition to standard debt collection licenses, several states now require a specialized student loan servicer license. For example, California, Colorado, Illinois, and Massachusetts have enacted legislation requiring certain entities working with student loans to obtain dedicated licenses.
These licenses often apply to entities servicing performing student loans, but in some cases may also include defaulted loans, depending on the state and nature of activity. Simply holding a general debt collection license may not be sufficient for those handling student loans, particularly if the activities go beyond basic collections.
Understanding Exemptions
Some states offer statutory exemptions to their student loan servicing laws. These may apply to entities servicing loans under a direct contract with the federal government, or to those working exclusively with non-defaulted loans. However, these exemptions can be narrow and should not be interpreted too broadly. It’s important for organizations to conduct a legal review to determine whether any exemption applies to their specific business model and activities.
Servicers and collectors should work with licensing professionals to confirm whether their activities fall under a state’s definition of student loan servicing or collection. Misinterpreting exemption criteria can result in compliance issues that could have been avoided through early legal analysis.
Licensing Considerations for Debt Buyers
Debt buyers must be particularly cautious. When purchasing student loan portfolios, especially those that include federal or private student loans, licensing requirements should be reviewed as part of the due diligence process.
Licensing needs may vary depending on:
- The type of debt purchased (federal vs. private)
- The status of the loans (performing vs. defaulted)
- The actions taken post-purchase (servicing, collections, litigation, credit reporting)
Some states require debt buyers to obtain specific licenses even if they outsource collection activities. In others, registration or licensing may be tied to the entity’s intent to service or enforce the debt. Given the complexity, it’s advisable for buyers to consult legal counsel and licensing experts before acquiring new portfolios.
Preparing for May 5: Compliance Recommendations
As federal student loan collections resume, this is a critical time for servicers, collectors, and debt buyers to evaluate their regulatory readiness. Consider the following steps:
- Review Your Licensing Footprint: Map out where your borrowers are located and determine which licenses are required for the services you provide.
- Consult Legal Counsel: When there is uncertainty about whether a license is required or if an exemption applies, seek legal guidance.
- Engage Licensing Experts: Work with professionals who specialize in state licensing to ensure applications, renewals, and exemptions are properly handled.
- Update Internal Protocols: Make sure compliance programs reflect the return of federal collection activity, including training, documentation, and state-specific requirements.
Final Thoughts
The May 5 restart of federal student loan collections is a significant compliance milestone for the industry. With multiple states now requiring student loan-specific licensing and others continuing to interpret their existing laws, organizations should not delay in reviewing their readiness.
Rather than making assumptions about exemptions or licensing obligations, organizations should seek professional advice tailored to their operations and the jurisdictions in which they operate. Taking a proactive approach now can help ensure smoother operations and reduce the risk of regulatory exposure as federal student loan collections resume.
