United States: Many States Can Revoke Professional And Other Licenses As Means Of Collecting Unpaid Student Loans

As of March 23, at least 19 states hold or revoke the state-issued licenses of teachers and/or other professionals if the borrower is in default on their student loans. These jurisdictions span the country, both ideologically and geographically:

Some of these provisions have been in place for 20 years or longer. Many, if not all, date to an era before the federal government assumed its preeminent role in the student lending market.

The federal government originally encouraged the emergence and proliferation of these laws. In 1990, a U.S. Department of Education handbook urged states to enact legislation that would "[d]eny professional licenses to defaulters until they take steps to repayment." This advice was followed by twenty-two states. Typically, these laws apply to any profession that requires a worker to have a license, certificate, registration, or approval to legally work in the state. Accordingly, depending on the jurisdiction, they can affect health professionals, veterinarians, attorneys, engineers, psychologists, teachers, and even barbers.

For all their similarities, these laws have different effects across these diverse states for three reasons. First, the average default rate is a study in contrasts, with a low of 6.4% in North Dakota and a high of 15.1% in Mississippi. Second, the average debt for members of the Class of 2014 likewise varies considerably, reaching as high as $31,579 in Minnesota and dipping as low as $21,382 in California. Third, variations in coverage and enforcement abound, as the following examples show:

  • Iowa, for instance, allows for the revocation of any state-issued license, including a driver's license. In 2012, more than 900 driver's licenses had been temporarily suspended in the Hawkeye State for failure to pay student loans. Yet, state officials denied that the law has been recently used. Indeed, the Iowa College Student Aid Commission, which once collected federal loans in the state, retreated from encouraging revocation after transferring its student loan portfolio to a private servicer. Still, efforts to date to formally abolish this statute have failed.
  • For its part, Kentucky does not track how many default notices it sends to licensing agencies. However, a review of the records of licensing boards throughout the Bluegrass State revealed that the licenses of 308 nurses and 223 teachers were revoked in recent years for student loan default.
  • In one state with an acute nursing shortage—Louisiana—the statewide nursing board notified 87 nurses that their defaulted student loans would bar renewal of their licenses in 2017. This was an increase of around 11.54% from 2016, and approximately 50% of these nurses were first-time defaulters. While 84 nurses eventually paid off their loans, the three that could not no longer work in the medical field.
  • Tennessee has proven particularly aggressive: from 2002 to 2017, officials from the Tennessee Student Assistance Corporation ("TSAC"), the state-run entity responsible for enforcing the law, reported more than 5,400 people to the state's professional licensing agencies. In one month alone, 42 Tennessee nurses lost their licenses as a result of these state regulations. "It's an attention getter," TSAC's chief aid and compliance officer stated, in discussing the effort. "[Borrowers] made a promise to the federal government that they would repay these funds. This is the last resort to get them back into payment."
  • Per a 2015 law, South Dakota suspends driver's, hunting, and fishing licenses, as well as camping and park permits. Through October 2017, Jeff Holden, commissioner of the South Dakota Bureau of Administration, sent over 21,162 accounts to South Dakota Game, Fish and Parks, the agency in charge of the state's parks, fisheries, and wildlife, for this very purpose. The agency estimated that 3,000 to 4,000 people on the Obligation Recovery Center's bad debt list held hunting or fishing licenses in 2016 alone. From October 1 through November 18, 2017, 1,550 more had their licenses blocked or nullified.

In light of the student loan crisis, and as their role as lenders has receded, some states are revisiting these statutes. In fact, until 2014, the laws of at least 22 states contained default-triggered revocation provisions. However, Montana repealed its provision in 2015; Oklahoma and New Jersey did the same in 2016; and multiple bills were introduced in both houses of Tennessee's legislature to do so in 2017-18. Meanwhile, many states in which the laws remain on the books rarely enforce them. This is the case in Alaska, Hawaii, Massachusetts, and Washington (with Hawaii's state licensing board never having enforced the revocation law). Finally, New Mexico's statute is scheduled to sunset July 1, 2020.

The Troutman Sanders' Consumer Financial Services Law Monitor blog offers timely updates regarding the financial services industry to inform you of recent changes in the law, upcoming regulatory deadlines and significant judicial opinions that may impact your business. To view the blog, click here

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Timothy St. George
Stephen Piepgrass
Alan D. Wingfield
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