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States urge Department of Education to protect federal student loans borrowers as CARES Act deadline approaches
On August 6, the NYDFS sent a letter to the Department of Education, urging Secretary Betsy DeVos to take measures to protect student loan borrowers when federal student loan borrower relief under the CARES Act ends September 30. Currently, the CARES Act provides an automatic freeze for borrowers with Federal Family Education Loan Program and Federal Direct loans (covered by a Buckley Special Alert), and stipulates that during the suspension period, interest will not accrue, servicers will report suspended payments as having been made to consumer reporting agencies, and—for borrowers in loan forgiveness or rehabilitation programs—servicers will treat suspended payments as having been made.
The letter, sent on behalf of seven state student loan ombudspersons, expresses concerns that, despite protections afforded by the CARES Act, “many borrowers are being left behind and . . . borrowers will face hardships once the CARES Act coverage expires.” Specifically, the letter requests DeVos to take additional proactive steps, including: (i) expanding the CARES Act protections to federal borrowers not currently eligible for relief (i.e., “borrowers whose loans are owned by commercial lenders and Perkins Loan borrowers whose loans are owned by their schools”) and extending the term of those protections; (ii) ensuring servicers are prepared for the September 30 end-date to ensure that borrowers are not harmed when their student loan accounts are placed back into repayment status; and (iii) streamlining access to income driven repayment (IDR) plans by eliminating “logistical and administrative barriers to automated IDR plan enrollment” and recommending “that borrowers be able to self-report income and that applications be deemed provisionally approved upon submission, even if incomplete, so that relief is given as quickly as possible.”
State AGs ask court to vacate Department of Education’s 2019 “Institutional Accountability” regulations
On July 15, a coalition of state attorneys general from 22 states and the District of Columbia filed a complaint in U.S. District Court for the Northern District of California against Secretary of Education Betsy DeVos and the Department of Education, asking the court to vacate the Department’s 2019 final Institutional Accountability regulations (2019 Rule). As previously covered by InfoBytes, the 2019 Rule—which took effect July 1, 2020—revises protections for student borrowers who were significantly misled or defrauded by their higher education institutions, and establishes standards for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.” Loans disbursed prior to July 1, 2020 remain subject to defenses under prior regulations issued in 2016 (2016 Rule). Earlier this year, H.J. Res. 76, which provided for congressional disapproval of the 2019 Rule (covered by InfoBytes here), was vetoed by President Trump.
The AGs allege in their complaint that the Department’s 2019 Rule, among other things, “completely eliminate[s] violations of applicable state consumer protection law as a viable defense to repayment of federal student loans” and “impose[s] additional requirements on a viable misrepresentation defense that are so onerous that they make this defense impossible for a student borrower to assert successfully.” Moreover, the AGs contend that the Department has “failed to meet its congressional mandate to specify actual borrower defenses” by promulgating a rule that serves only to prevent borrowers from obtaining relief. On these grounds, the AGs claim the 2019 Rule violates the Administrative Procedure Act (APA).
The AGs highlight several aspects of the 2019 Rule that support its claims, including that the elimination of the 2016 Rule’s limitations on the use of class action waivers and mandatory predispute arbitration agreements is arbitrary and capricious. According to the AGs, the Department’s “conclusion that requiring schools to disclose their use of mandatory predispute arbitration agreements and class action waivers will adequately protect borrowers is also contrary to substantial evidence and [the Department’s] own prior conclusions.”
CFPB updates Covid-19 student loan debt relief guidance for borrowers
On April 9, the CFPB released updated guidance for student loan borrowers during the Covid-19 pandemic. As previously covered by InfoBytes, the Bureau first released student loan borrower information on March 27, which covered debt relief provided by the CARES Act, including the automatic freeze on student loan payments until September 30 for those with federally held loans. Servicers will send required notices detailing the payment freeze to borrowers by the middle of April. The guidance notes that some federal student loans—including some Federal Family Education Loans—may be held by commercial lenders. These loans and other privately held loans do not qualify for automatic suspension of payments, and the Bureau encourages borrowers to contact their servicers for debt relief options such as deferment or forbearance if borrowers have difficulty making payments at this time. Borrowers with Perkins loans may also request loan forbearance from the borrowers’ institution for up to three months without submitting documentation.
Lawmakers want accountability for colleges receiving CARES Act funds
On April 8, Senators Elizabeth Warren (D-MA), Dick Durbin (D-IL), Sherrod Brown (D-OH), and Richard Blumenthal (D-CT) sent a letter to the Department of Education urging the Department to focus the CARES Act funding for institutions of higher education on public and nonprofit schools. In addition, the lawmakers call for “strong accountability polices” if for-profit colleges are eligible for the funds. The recommended policies “to protect students and taxpayers” include: (i) requiring that all funding must be used for “student instruction, emergency financial aid to students, and student support services”; (ii) preventing for-profit colleges from using the funds for executive compensation and freezing executive compensation; (iii) preventing publicly-traded for-profit colleges from buying back their stock; (iv) preventing for-profit colleges from using the funds for recruiting, marketing and advertising; (v) preventing for-profit colleges that receive funds from receiving other CARES Act funds; (iv) “[c]onsider[ing] CARES Act funding as federal funding for 90/10 compliance”; and (v) requiring that Congress receive a report detailing “how for-profit colleges used the funds.” The letter requests replies to the questions by April 21.
Department of Education provides Covid-19 relief by pausing loan collections, issuing refunds
On March 25, U.S. Secretary of Education Betsy DeVos announced that in order to provide additional relief for student loan borrowers, the Department will take a number of actions which include the following:
- Stop collection activities and wage garnishments for at least 60 days, effective March 13;
- Stop requests to the Department of Treasury to withhold funds from “defaulted borrowers' federal income tax refunds, Social Security payments, and other federal payments”;
- Refund almost $2 billion to over 830,000 borrowers from funds previously withheld as of March 13;
- Direct private collection agencies to “halt all proactive collection activities, including making phone calls to borrowers and issuing collection letters and billing statements,” however, “[p]rivate collection agencies are permitted to provide assistance upon the borrower's request”;
- Begin to “monitor employers' compliance with the request to stop wage garnishment.” Those “[b]orrowers whose wages continue to be garnished after March 13 should contact their employers' human resources department.”
Borrowers with defaulted loans who would like to “continu[e] a prior payment arrangement, consolidat[e] their loans, or begin[] a loan rehabilitation arrangement with their private collection agency, should contact the Department's Default Resolution Group at 1-800-621-3115 (TTY for the deaf or hearing-impaired 1-877-825-9923).”
For more information, borrowers may visit StudentAid.gov/coronavirus.
Bill overturning Department of Education’s 2019 Borrower Defense Rule sent to president
On March 11, the U.S. Senate, in a 53-42 vote, joined the House in passing H.J. Res. 76, which provides for congressional disapproval of the Department of Education’s 2019 Borrower Defense Rule (the Rule). As previously covered by InfoBytes, the Rule, published last September and set to take effect July 1, revises protections for student borrowers that were significantly misled or defrauded by their higher education institution and establishes standards for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.” If signed by the president, H.J. Res. 76 would undo changes made by the Rule that, among other things, would have required individuals to apply to the Department for a defense to repayment (under the 2016 Rule, applications could be submitted on behalf of an entire group). H.J. Res. 76 would also undo the Rule’s elimination of automatic closed-school discharges and its ban on pre-dispute arbitration and class action waivers that were previously contained within the 2016 Rule.
State student loan ombudspersons push for automatic student loan discharges for disabled civilian borrowers
On March 3, student loan ombudspersons from seven states and the District of Columbia sent a joint letter to U.S. Department of Education (Department) Secretary Betsy DeVos and Social Security Administration (SSA) Commissioner Andrew Saul advocating for the automatic discharge of student loans for eligible borrowers under the Total and Permanent Disability (TPD) loan discharge program. Describing the current TPD program’s application process as “onerous,” the letter cites to the Department’s implementation of a presidential directive in 2019 that granted automatic student loan discharges to disabled veterans (covered by InfoBytes here), as an example of how to provide relief to borrowers “without further burdening them with a cumbersome application process.”
As asserted by the ombudspersons, the Higher Education Act of 1965 makes clear that a qualifying borrower’s loans shall be discharged if the borrower is (i) “permanently and totally disabled,” or (ii) “is ‘unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, has lasted for a continuous period of not less than 60 months, or can be expected to last for a continuous period of not less than 60 months.” The ombudspersons claim that the current TPD program’s application process is difficult for disabled borrowers to complete, and the difficulties posed by the annual documentation submission requirement during the post-discharge three-year monitoring period poses a risk of “having the[] discharged loans reinstated.” The student loan ombudspersons urged the Department and the SSA to work together to allow the Secretary to accept information shared by the SSA that the borrower is permanently disabled for the purpose of granting the discharge of student loan debt, and to minimize or eliminate the need for borrowers to proactively participate in the post-discharge monitoring process.
Senate Democrats ask Office of Civil Rights to address student lending racial disparities
On February 27, Senators Elizabeth Warren (D-MA), Kamala Harris (D-CA), and Cory Booker (D-NJ) sent a letter to the Department of Education’s Office of Civil Rights (OCR) asking how the office plans to address reports of racial disparities within the federal student loan industry. The letter discusses OCR’s responsibility for enforcing civil rights laws that prohibit discrimination in Department-funded programs and activities, including student aid funding, and notes that OCR also bears the responsibility for examining the role federal student loan contractors may play in racial disparities faced by students of color after they leave their institution of higher learning. The Senators claim that for-profit colleges “disproportionately target students of color and often leave them deep in debt while providing little education value in return.” The Senators also cite new Department data, which shows that “despite using [income-driven repayments] at a much higher rate than other borrowers with the same level of education, Black student borrowers continued to have a higher default rate than their peers, regardless of the type of institution they attended.” Latino and Native student borrowers are also affected by these racial disparities, the letter notes.
Among other things, the Senators request the following from OCR by March 26:
- Provide a summary of all current and ongoing actions, including enforcement actions, that OCR has taken since January 2017 to address racial disparities in student loan borrowing and outcomes;
- Conduct a comprehensive investigation into the ways predatory colleges and the student loan industry contribute to racial disparities, such as through servicing and debt collection practices, access to repayment plans, and debt cancellation options for borrowers of color; and
- Develop a plan to address racial disparities in the student loan industry, including legislative recommendations and new policy guidance to entities involved in the industry.
District court dismisses FCA claims against student loan collectors
On February 11, the U.S. District Court for the District of Columbia dismissed a relator’s False Claims Act claims, which alleged that a group of prime private student loan debt collectors (defendants) defrauded the federal government of funds intended for small businesses in relation to contracts to service student loans with the Department of Education (Department). The 2015 lawsuit filed by the relator accused the defendants of, among other things, allegedly concealing that “the purportedly small business subcontractors were affiliated with ‘co-conspirator’ larger businesses, ‘making them ineligible to be claimed as small businesses by the prime contractors on the [Department’s private collection agency] task orders.’” The relator also claimed that the defendants convinced the Department to award contracts and provide bonuses they did not deserve. According to the relator, the defendants made claims that hinged “on the factual allegation of undisclosed affiliation and associated submission of false claims and/or misrepresentations concerning business size.”
In the order, the court determined, among other things, that the relator fell short of alleging the specific facts necessary to convince the court that the defendants engaged in fraudulent inducement and implied certification. The court held that “despite [the relator’s] contrary contentions, [the relator’s] pleading does not establish with the requisite particularity the time and place of the false misrepresentations, what constitutes the allegedly false claim for each discrete defendant, and what, precisely, ‘was retained or given up as a consequence of the fraud.’” Specifically, the court stated that the relator “fail[ed] to connect several critical dots in the alleged scheme, leaving the [c]ourt unclear as to what, precisely, was allegedly actionably false and/or fraudulent.” However, the court allowed the relator leave to file an amended complaint, stating that “because the allegation of further facts might cure the identified deficiencies (although the [c]ourt has its doubts, given the length of the investigation and [the relator’s] counsel’s central role in the investigation), the [c]ourt sees no reason to deviate from the general rule [allowing leave].”
11th Circuit: Guaranty agency collecting nonexistent DOE loans is not a debt collector
On February 7, the U.S. Court of Appeals for the Eleventh Circuit issued a split opinion holding that a student loan guaranty agency that mistakenly attempted to collect nonexistent student loans cannot be sued under the FDCPA because, as a guaranty agency operating on behalf of the Department of Education (Department), it does not qualify as a “debt collector” under the Act. According to the opinion, the plaintiff alleged that during a scheduled deferment period, the agency notified the plaintiff that it had paid a default claim on the loans and demanded full repayment. The plaintiff alleged that she called to dispute the demand and was told the agency had no record of her debt. Subsequently, the agency ordered the plaintiff’s employer to garnish her wages, and the plaintiff filed a complaint alleging, among other things, that the defendant violated the FDCPA by making false or misleading representations and failing to validate the debt. The plaintiff also alleged that the defendant engaged in fraudulent business practices. The district court granted summary judgment in favor of the defendant, ruling that the defendant was not a debt collector subject to the FDCPA because it was acting “incidental to a bona fide fiduciary obligation” to the Department. While the plaintiff conceded that a guaranty agency’s actions are incidental to a fiduciary obligation when it attempts to collect valid defaulted student loans, she argued that the exemption does not apply when the guaranty agency attempts to collect debts that do not exist.
On appeal, the majority agreed with the district court, holding that determining whether the defendant was a debt collector subject to the FDCPA did not depend on the validity of the claimed debt. The majority held that as long as the defendant was acting in good faith, its collection efforts would be incidental to its fiduciary obligation to the Department and exempted from the definition of “debt collector.” Specifically, the majority referenced language from the FDCPA establishing that the fiduciary obligation exemption applies when an agency attempts to collect a debt that is “owed or due or asserted to be owed or due another,” holding that such language must apply to efforts to collect debts that do not exist or that phrase would have no meaning. According to the majority, “Congress easily could have written the [FDCPA] to impose liability on persons who attempt to collection nonexistent debts pursuant to a fiduciary obligation,” but Congress chose not to.