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On August 14, the U.S. District Court for the Eastern District of Michigan dismissed without prejudice a lawsuit filed against the federal government aimed at blocking the Biden administration’s effort to provide debt relief to student borrowers (covered by InfoBytes here). U.S. District Judge Thomas L. Ludington held that the plaintiffs lacked standing because they failed to plausibly demonstrate how the government’s plans would impact their efforts to recruit participants as qualified employers under the Public Service Loan Forgiveness program. The court detailed that “[Plaintiffs] merely make vague and conclusory statements that some ‘undisclosed’ number of borrowers will receive credit toward loan forgiveness for some periods of forbearance” but “do not allege that any current employee received Adjustment credit.” Furthermore, any such “hypothetical injur[y]” would be traceable to “Plaintiffs’ own employees or prospective employees, not the Adjustment.” Because there was no standing, the court dismissed the complaint without prejudice and denied the plaintiffs’ motion for a temporary restraining order and preliminary injunction as moot.
On August 4, two nonprofit entities filed a lawsuit against the federal government aimed at blocking the Biden administration’s recent effort to provide debt relief to student borrowers. The administration’s efforts were implemented in response to the Supreme Court’s June 30 decision striking down the DOE’s student loan debt relief program that would have canceled between $10,000 and $20,000 in debt for certain student borrowers (covered by InfoBytes here). The lawsuit, filed in the U.S. District Court for the Eastern District of Michigan, targets the administration’s efforts to credit borrowers participating in the Public Service Loan Forgiveness (PSLF) plan and Income-Driven Repayment (IDR) plan by providing credit for periods when loans were in forbearance or deferment, which would affect more than 804,000 borrowers, forgiving approximately $39 billion in loan payments, according to the DOE.
As an initial matter, plaintiffs assert that they are injured by the administration’s actions because, as 501(c)(3) nonprofit organizations, they benefit from the PSLF program by allowing them to “attract and retain borrower-employees who might otherwise choose higher-paying employment with non-qualifying employers in the private sector.” Thus, according to plaintiffs, cancellation of PSLF loans would reduce the incentive for borrowers to work at public service employers and the decision “unlawfully deprives [PSLF] employers of the full statutory benefit to which they are entitled under PSLF.”
Plaintiffs accuse the administration of putting the plan on an “accelerated schedule apparently designed to evade judicial review.” The plaintiffs assert that the DOE lacks authority to classify “non-payments as payments,” and that the statutes for the PSLF and IDR programs require actual payments to qualify for forgiveness under each plan. The suit brings four claims against the administration: (i) violation of the Appropriation Clause of the U.S. Constitution by canceling debt that Congress did not authorize; (ii) violation of the Administrative Procedure Act (APA) by issuing a final agency decision without appropriate statutory authority; (iii) violation of the APA by taking an arbitrary and capricious agency action by failing to “explain why [DOE] has changed its policy from not crediting non-payments during periods of loan forbearance to crediting such payments for purposes of PSLF and IDR forgiveness” and “entirely fail[ing] to consider the cost to taxpayers of crediting periods of forbearance toward PSLF and IDR forgiveness,” among other reasons; and (iv) violation of the APA by failing to undertake notice-and-comment procedures in implementing the changes.
On October 31, the Department of Education (DOE) announced final rules to streamline and improve targeted debt relief programs. (See DOE fact sheet here.) The final rules implement several changes to protect student borrowers, including:
- Borrower defense to repayment and arbitration. The final rules establish a strong framework for borrowers to raise a defense to repayment if their post-secondary institution misleads or manipulates them. Claims pending on or received on or after July 1, 2023, can be decided individually or as a group, and may be based on one of the following categories of actionable circumstances: substantial misrepresentation, substantial omission of fact, breach of contract, aggressive and deceptive recruitment, or judgments or final secretarial actions. The final rules will only provide full relief (partial discharges will not be considered), with approved claims requiring “that the institution committed an act or omission which caused the borrower detriment of such a nature and degree that warrant full relief” based upon a preponderance of the evidence. Additionally, the final rules establish certain recoupment processes for DOE to pursue institutions for the cost of approved claims, and will allow borrowers to litigate their case “by preventing institutions that participate in the Direct Loan program from requiring borrowers to engage in pre-dispute arbitration or sign class action waivers.”
- Closed school discharges. The final rules provide an automatic discharge of a borrower’s loan “one year after a college’s closure date for borrowers who were enrolled at the time of closure or left 180 days before closure and who do not accept an approved teach-out agreement or a continuation of the program at another location of the school.” Borrowers who accept but do not complete a teach-out agreement or program continuation will receive a discharge one year after the last date of attendance.
- Total and permanent disability discharge. The final rules include new options for borrowers who have had a total and permanent disability to receive a discharge, including borrowers (i) who receive additional types of disability review codes from the Social Security Administration (SSA); (ii) who later aged into retirement benefits and are no longer classified by one of SSA’s codes; (iii) who have an established disability onset date determined by SSA to be at least 5 years in the past; and (iv) whose first continuing disability review is scheduled at three years. The final rules also eliminate a three-year income monitoring requirement.
- Interest capitalization. Under the final rules, “interest will no longer be added to a borrower’s principal balance the first time a borrower enters repayment, upon exiting a forbearance, and leaving any income-driven repayment plan besides Income-Based Repayment.” Specifically, the final rules eliminate all instances where interest capitalization—which occurs when a borrower has outstanding unpaid interest added to the principal balance—is not required by law.
- Public Service Loan Forgiveness. As previously covered by InfoBytes, the final rules will provide benefits for borrowers seeking Public Service Loan Forgiveness, including providing credit toward the program for borrowers who have qualifying employment.
- False certification. The final rules will provide borrowers with an easier path to discharge when a college falsely certifies a borrower’s eligibility for a student loan. This includes expanding allowable documentation, clarifying applicable discharge dates, and allowing for the consideration of group discharges.
The final rules are effective July 1, 2023.
On October 25, the Department of Education (DOE) announced executive actions intended to bring loans managed by the DOE closer to forgiveness, including credit toward the Public Service Loan Forgiveness (PSLF) Program for borrowers who have qualifying employment. According to the DOE, these actions will provide borrowers with many of the same benefits already going to those who have applied for PSLF under temporary changes (known as the Limited PSLF Waiver), before its October 31, 2022 end date. The announcement further noted that borrowers with Direct Loans or DOE-managed Federal Family Education Loans (FFEL) will receive credit toward forgiveness on income-driven repayment (IDR) for all months spent in repayment, including payments prior to consolidation, regardless of whether they made partial or late payments or are on a repayment plan. Borrowers will also receive credit for specific periods in deferment and forbearance. Even with these actions, the DOE encouraged borrowers to take the necessary steps to apply for the Limited PSLF Waiver by October 31. The DOE also released a Fact Sheet outlining benefits for borrowers who have Direct or DOE-managed FFEL loans as well as Direct Loan borrowers seeking PSLF.
On September 15, the New York governor signed S.8389-C/A. 9523-B , which amends the Public Service Loan Forgiveness (PSFL) program statewide. Among other things, the legislation: (i) adds clarifying legal definitions, such as “certifying employment,” “employee,” “full-time,” “public service employer,” “public service loan forgiveness form,” and “public service loan forgiveness program”; (ii) establishes a standard hourly threshold for full-time employment at thirty hours per week for the purposes of accessing PSLF; and (iii) permits public service employers to certify employment on behalf of individuals or groups of employees directly with the U.S. Department of Education. The legislation is effective immediately.
On September 7, the U.S. Court of Appeals for the Second Circuit affirmed a class action settlement reached between a student loan servicer and borrowers who claimed the servicer failed to inform them of a loan forgiveness program for public service employees. As previously covered by InfoBytes, the settlement required the servicer—who denied any allegations of wrongful conduct and damages—to put in place enhancements to identify borrowers who may qualify for Public Service Loan Forgiveness (PSLF) and “distribute comprehensive and accurate information about how to qualify, which are meaningful business practice enhancements.” The servicer was also required to fund a $2.25 million non-profit program to provide counseling to borrowers at all stages of the repayment process. The settlement also approved service awards for the named plaintiffs. In affirming the settlement, the appellate court rejected arguments raised by objectors who claimed, among other things, that the cy pres award would not benefit the class and “that the settlement improperly released monetary claims.”
“The cy pres award funds Public Service Promise and thereby assists all class members in navigating PSLF and determining whether they have a viable individual monetary claim against [the servicer],” the panel wrote, acknowledging that other circuit courts have recognized that class members can indirectly benefit from defendants paying appropriate third parties. “[T]he reforms will also benefit the remaining class members who, for example, are no longer with [the servicer] or who no longer have student loans, by providing them accurate information about the PSLF and helping them determine whether they have viable individual claims for damages,” the 2nd Circuit said.
On July 29, a coalition of state attorneys general sent a letter to President Biden and Department of Education Secretary Miguel Cardona, requesting the extension of the deadline for individuals to file claims under the Public Service Loan Forgiveness (PSLF) program. As previously covered by InfoBytes, in October 2021, the Department announced several significant changes to its PSLF program, including that approximately 22,000 borrowers with consolidated loans (including loans previously ineligible) may be immediately eligible to have their loans forgiven automatically, and another 27,000 borrowers could have their balances forgiven if they are able to certify additional periods of public service employment. According to the AGs, “it is critically important to extend the waiver at least until new PSLF regulations take effect and to grandfather in waiver benefits for borrowers who miss administrative deadlines.” The AGs also asked the Biden administration to count all forbearance periods toward loan forgiveness, rather than making exceptions for servicemembers and longer periods of forbearance for everyone else. The letter stated that “[f]ailure to automatically count periods of forbearance toward loan forgiveness ignores pervasive and well-established servicing problems and inappropriately shifts the burden to borrowers to identify and prove that they were victims of servicer misconduct.” The AGs urged the Biden administration “to exercise its authority to synchronize the One-Time Adjustment and Limited PSLF Waiver into a unified adjustment policy.” The letter specifically stated that the “simplest way of doing so may be to incorporate certain critical aspects of the waiver into the One-Time Adjustment, including that qualifying employment at the time of forgiveness is not necessary and that consolidations (whether of FFEL or Direct Loans) occurring prior to the completion of the One-Time Adjustment do not negate past qualifying employment periods for PSLF.”
On July 13, NYDFS called on all federal student loan servicers to increase awareness of and enroll borrowers in public service loan forgiveness programs before a temporary waiver expires on October 31. NYDFS’s letter reminded servicers that under the Public Service Loan Forgiveness (PSLF) program, full-time government and certain non-profit employees may be eligible to have federal direct loans forgiven after making 120 qualifying monthly payments. Last October, the Department of Education announced temporary PSLF changes due to the Covid-19 pandemic. These changes provided qualifying borrowers a time-limited PSLF waiver, which allows all payments to count towards PSLF regardless of loan program or payment plan (covered by InfoBytes here). Expressing concerns that many borrowers may not learn of this opportunity before it expires in October, NYDFS encouraged servicers to adopt eight best practices to promote awareness of the PSLF Program and the waiver. These include “enhanced trainings for customer service staff, proactive communications with borrowers, and increased promotion of the PSLF program on servicer websites and on borrower account pages,” NYDFS said in its announcement.
The letter follows a December 2021 NYDFS request sent to federal student loan servicers asking for updates on steps taken to address the waived rules. NYDFS also reminded servicers that it “will diligently enforce all servicer legal requirements concerning the PSLF program and will consider the extent to which servicers engaged in proactive measures to promote the PSLF Waiver in future supervisory examinations.”
On March 30, the CFPB announced a settlement with a student loan servicer to resolve allegations that the company engaged in deceptive acts with respect to borrowers with Federal Family Education Loan Program (FFELP) loans about their eligibility for Public Service Loan Forgiveness (PSLF), in violation of the Consumer Financial Protection Act, among other things. The CFPB alleged that the company engaged in unfair, deceptive, or abusive acts or practices by misrepresenting: (i) that FFELP borrowers could not receive PSLF; (ii) that FFELP borrowers were making payments towards PSLF before loan consolidation; and (iii) that certain jobs were not eligible for PSLF. The Bureau also alleged that the servicer “did not provide any information about how to become eligible for PSLF when borrowers inquired about the program or mentioned that they worked in a job that was likely a qualifying public-service job.”
Under the terms of the consent order, the servicer is required to: (i) notify all affected borrowers of the Department of Education’s limited PSLF waiver to provide affected consumers the opportunity to take advantage of the waiver before it ends on October 31; (ii) “develop and implement a call script for Customer Service Representatives that, at minimum, requires them to solicit information from all FFELP Consumers about whether a consumer’s employment may make them eligible for PSLF, and if so, to direct them to a Public Service Specialist, who will provide accurate and complete information about PSLF”; and (iii) pay a civil money penalty of $1 million to the Bureau.
According to a statement by CFPB Director Rohit Chopra, the Bureau “has long been concerned that others in the student loan servicing industry have derailed borrowers from making progress toward loan cancellation,” and “CFPB law enforcement work has identified these problems for years, finding failures at multiple servicers.”
On February 18, the CFPB released a compliance bulletin warning student loan servicers to make sure they provide complete and accurate information to eligible borrowers about Public Service Loan Forgiveness (PSLF) benefits. The Bureau indicated that it will be paying close attention to servicers’ compliance with Dodd-Frank’s prohibition on unfair, deceptive, or abusive acts or practices. Last October, the Department of Education changed its PSLF program to now provide qualifying borrowers with a time-limited PSLF waiver that allows all payments to count towards PSLF regardless of loan program or payment plan. The waiver covers payments made on loans under the Federal Family Education Loan Program or Perkins Loan Program. (Covered by InfoBytes here.) However, Bureau supervisory findings revealed unfair or deceptive practices taken by servicers that have prevented many borrowers from making progress towards forgiveness. The Bureau emphasized that it expects servicers to comply with federal consumer financial protection laws when administering the new PSLF waiver and providing assistance to borrowers. The Bureau “will pay particular attention” to whether (i) servicers of any federal loan type provide complete and accurate information about the PSLF waiver in communications related to PSLF or loan consolidation; (ii) servicers have adequate policies and procedures to recognize when borrowers express interest in PSLF or the PSLF waiver (or where borrowers’ files otherwise demonstrate their eligibility), in order to direct borrowers to appropriate resources; and (iii) servicers take measures “to promote the benefits of the PSLF Waiver to borrowers who express interest or whose files otherwise demonstrate their eligibility.” The Bureau advised servicers to consider enhancing their compliance management systems to ensure borrowers receive accurate and complete information about the PSLF waiver and that their enrollment is facilitated.