Should Federal Student Loan Servicers Be Held Responsible When They Misrepresent the Borrowers Options?

In the Seventh Circuit, which includes Illinois, Indiana and Wisconsin – the answer is “YES” in a ground breaking ruling against Great Lakes this week.    Servicers must tell the truth when a student loan borrower asks questions about their options to repay student loans.  Servicers who steer borrowers into plans that benefit lenders,forcing borrowers struggling to keep up with their loans, can be held liable.  Halleluja!! (yes, I had to look up how to spell that 🙂

In Florida, we still don’t know.  We have a pending class action on appeal with our co-counsel against the very same defendant, Great Lakes, making the same arguments in the context of the Public Service Loan Forgiveness program.

This borrower, Nicole Nelson, says she was never informed about income-based repayment plans, which federal law requires loan servicers to offer. Income-based plans set monthly loan payments as a percentage of a borrower’s discretionary income, but, according to Nelson, these plans are less lucrative for lenders and the enrollment process is time-consuming for the loan servicer.  Instead, the servicer pushed forbearance.  We tell clients that forbearances are the drug of choice for servicers because it is easy to grant, and runs the loan balance up.  Forbearances do have their place, but they should be considered as a bandaid for a temporary reprieve, not a long-term solution.

So in this case, the trial level federal judge ruled for Great Lakes, finding that Nelson’s allegations all pertain to information Great Lakes’ representatives supposedly failed to disclose, and are preempted by the Higher Education Act.

But the Seventh Circuit reversed Thursday, saying the district court’s ruling was “overly broad.”

“When a loan servicer holds itself out to a borrower as having experts who work for her, tells her that she does not need to look elsewhere for advice, and tells her that its experts know what options are in her best interest, those statements, when untrue, cannot be treated by courts as mere failures to disclose information,” Seventh Circuit Judge David Hamilton wrote for the three-judge panel. “Those are affirmative misrepresentations, not failures to disclose. Great Lakes chose to make them.”

Again, same in Florida, our class action was dismissed when the lower court found that the Higher Education Act preempts all consumer state claims.  In other words, the servicer can do and say whatever it wants and there is absolutely no recourse!!  Even the Judge disagreed with the outcome stating “[t]his Court is troubled that this preemption may permit loan servicers’ misrepresentation without borrowers benefitting from full remedies.  It is only with deep regret that this Court GRANTS Defendant’s motion.”  We have appealed and are awaiting the appellate court’s ruling now.  Our team is however glad that the Judge forced the issue early so that we can get past this legal hurdle now rather than a year or two down the road.

Our appellete co-counsel actually argued and won the issue before the Seventh Circuit on behalf of the National Student Loan Defense Network, so our Florida case is in good hands.  Let’s keep our fingers crossed that the Eleventh Circuit will do what’s right by student loan borrowers and hold servicers accountable like the Seventh Circuit just did, rather than rubber stamping whatever comes out of the customer representative’s mouth!