This great court ruling may help student loan borrowers
It’s tough for student loan borrowers. About 44 million Americans have student loan debt, and they must navigate a complex repayment system with dozens of different programs, each with their own complicated (and sometimes conflicting) eligibility requirements. It would be great if borrowers could count on their loan services – third-party companies hired by the federal government to oversee and operate its student loan portfolio – to help point them in the right direction. But that is often not possible.
Some of the larger student loan service companies, such as FedLoan Service and Navigate, have been accused of widespread unfair and deceptive practices such as deliberately encouraging borrowers to abstain, or failing to accurately convey essential information about student loan repayment and forgiveness programs. These companies have done well over the past decade. But, following a recent court decision, that may be about to change.
One of the particularly difficult aspects of the student loan system is that if a federal student loan borrower is subjected to some sort of misconduct on the part of their loan officer, there may not be a clear remedy under federal law. In fact, to prosecute a federal contractor for breach of his obligations, federal law must To allow for a lawsuit to be brought through what is sometimes referred to as a “private right of action”. The Higher Education Act – which is the extremely complex set of laws that governs most of the student loan system – does not provide any private right of action that would allow individual student loan borrowers to sue their loan manager for violations.
Numerous States, however, have state Applicable laws that make it illegal for any type of consumer finance company to engage in unfair or deceptive business practices. And several states recently passed student loan bills of rights, which specifically prohibit some of the most common misconduct by student loan officers. These laws, unlike the law on higher education, to do contain a private right of action that allows individuals to take legal action.
But it gets complicated. In recent years, when individual student loan borrowers have sued their loan officers for violating state consumer protection laws, the officers – backed by the federal government – have argued that federal law trumps law. of State. In other words, they argue that since federal law does not provide for any private right of action for breaches of higher education law, state law also cannot provide for a right of action. private action. This concept is called “preemption” – the idea that federal law supersedes, or preempt, state law.
This question of preemption has been the subject of several lawsuits. And a recent decision from a federal appeals court may have good news for borrowers. In Nelson v. Great Lakes Higher Education, a student loan borrower brought a lawsuit against his student loan officer under his state’s consumer protection law for misrepresenting his options for loan repayment and loan cancellation programs. As a result, she suffered financial damage.
The court in Nelson ruled that positive false statements – or the active efforts of a student loan officer to mislead borrowers about their rights, options, or obligations – are not preempted by federal law. This is potentially great news for student loan borrowers, as it could pave the way for individual lawsuits against loan officers under state law.
But this good decision comes with a few caveats. First, the decision is not binding on the whole country; it is only binding in the 7e Circuit competence (however, it could be used to persuade other circuits to adopt the same legal reasoning). Second, the ruling means that other forms of misrepresentation – such as omissions or simply not informing borrowers of all of their options – can still be preempted by federal law. This is a major problem because many student loan borrowers are simply not informed of their options (rather than being actively misled).
Nonetheless, this is a critical step as states and individuals attempt to hold federal student loan officers accountable for their misconduct. We will have to see if this decision is an aberration or a precursor.