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Financial Services Law Insights and Observations

Ninth Circuit Holds Higher Education Act Preempts Claims Against Student Loan Servicer

State Issues

On January 25, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s decision that the Higher Education Act (HEA) preempted California’s business, contract, and consumer protection laws in a putative class action challenging certain Sallie Mae loan servicing practices. Chae v. SLM Corp., No. 08-56154, 2010 WL 253215 (9th Cir. Jan. 25, 2010). In Chae, Sallie Mae serviced various educational loans that the plaintiffs originated with from several lenders. The plaintiffs alleged that Sallie Mae violated California law by (i) using the “daily simple interest” or “simple daily interest” method to calculate interest, (ii) charging late fees, and (iii) setting the first repayment date on certain loans within 60 days while also charging interest during that period, so as to “deceptively increase[] the cost and life span of the loan.” The Ninth Circuit concluded that express preemption and conflict preemption barred the claims of the putative class. According to the court, the plaintiffs’ allegations were prohibited, in part, by the express preemption provision of the HEA. The court held that the remaining claims were preempted because they conflicted with congressional purposes and objectives to promote the funding of student loans. The court noted that the plaintiffs are not left without redress. It explained that the Department of Education (DOE) has the power to initiate informal compliance procedures against a third-party servicer that is the subject of a complaint, file a civil suit again the servicer, impose civil penalties, or terminate the servicer’s participation in the student loan program.