Navient Sols., LLC v. Dep't of Educ.

646 F.Supp.3d 705

NAVIENT SOLUTIONS, LLC, Plaintiff, v. DEPARTMENT OF EDUCATION and Dr. Miguel Cardona,Secretary of Education, in his Official Capacity, Defendants.

Civil Action No. 1:21-cv-324

United States District Court, E.D. Virginia, Alexandria Division

Signed December 16, 2022

Ada Fernandez Johnson, Carter Burwell, Debevoise & Plimpton LLP, Washington, DC, Ryan Christopher Mullally, Pro Hac Vice, Debevoise & Plimpton, LLP, New York, NY, for Plaintiff.

Dennis Carl Barghaan, Jr., Hugham Chan, US Attorney's Office, Alexandria, VA, Thomas Dietrich Hill, Pro Hac Vice, US Department of Justice, Washington, DC, for Defendants.

MEMORANDUM OPINION

T.S Ellis, III, United States District Judge

At issue in this Administrative Procedure Act ("APA"), 5 U.S.C. § 500 et seq., dispute are the parties' cross motions for summary judgment (Dkts. 58, 63). Simply put, Plaintiff Navient Solutions, LLC ("Navient") alleges that the Department of Education (the "Department") acted arbitrarily and capriciously in violation of the APA when the Department determined that Navient erroneously claimed over $22 million in student loan-related subsidies from 2002 to 2005. Navient contends that in claiming those subsidies, Navient reasonably relied on two 1993 Dear Colleague Letters ("DCLs") issued by the Department authorizing Navient to collect subsidies for student loans funded in whole or in part by tax-exempt obligations. According to Navient, the Department issued a new DCL in 2007 which disavowed the guidance in the Department's two 1993 DCLs, but nonetheless stated that the Department would not collect past erroneous subsidies if Navient prospectively followed the Department's revised interpretation set forth in the 2007 DCL.

Despite the Department's statement in the 2007 DCL that the Department would not collect past erroneous subsidies if Navient prospectively followed the Department's new guidance, the Department initiated administrative proceedings seeking over $22 million in past subsidies collected by Navient pursuant to the 1993 DCLs. Specifically, the Department's Office of the Inspector General initiated an audit of Navient's billing practices in 2007, the results of which Navient appealed to an administrative law judge and finally to the Department's Acting Secretary of Education. After nearly 15 years of litigation in the administrative process, the Acting Secretary issued a final decision in January 2021 concluding that Navient had wrongfully claimed subsidies between 2002 and 2005. Navient contends that the Department's conclusion in the January 2021 final decision is arbitrary and capricious because (i) the Department failed to consider Navient's reliance interests, (ii) the Department improperly concluded that the bonds at issue constituted a singular "obligation," and (iii) the Department unfairly prejudiced Navient by bifurcating the proceedings. In response, the Department argues that Navient's reliance on the 1993 and 2007 DCLs was unreasonable and that the Department properly found through its administrative process that Navient unlawfully collected the student loan subsidies. The parties have filed cross motions for summary judgment, which have been fully briefed and argued at a hearing on October 5, 2022. Accordingly, the matter is now ripe for disposition.

I.

Summary judgment is appropriate where there are no genuine disputes of material fact and the moving party "is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Rule 56, Fed. R. Civ. P. When faced with cross-motions for summary judgment, "the court must review each motion separately on its own merits 'to determine whether either of the parties deserves judgment as a matter of law.' " Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir. 2003) (quoting Philip Morris Inc. v. Harshbarger, 122 F.3d 58, 62 n.4 (1st Cir. 1997)). When a court reviews at the summary judgment stage the decision of an administrative agency under the APA, the administrative record provides the complete factual predicate for the court's review. See Kan. by and through Kan. Dep't for Children and Families v. Source Am., 826 F. App'x 272, 282 (4th Cir. 2020) (explaining that in APA actions, "the focal point for judicial review should be the administrative record already in existence"). In other words, because inquiry into material outside of the administrative record is inconsistent with applying the arbitrary and capricious standard, summary judgment in an APA case "serves as the mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and otherwise consistent with the APA." Hyatt v. U.S. Patent & Trademark Office, 146 F. Supp. 3d 771, 780 (E.D. Va. 2015) (quoting Sierra Club v. Mainella, 459 F. Supp. 2d 76, 90 (D.D.C. 2006)).

Here, because the administrative record in this case is voluminous—several thousands of pages—an Order issued on January 12, 2022 directing Navient and the Department to submit a Joint Stipulation of Facts and Documents. See Dkt. 54. The parties complied and filed a Joint Stipulation of Facts and Documents on March 11, 2022. See Dkt. 56. A statement of facts based on the parties' stipulations and the record as a whole is set forth in the enumerated paragraphs below.

Although the facts in this case are not without some complexity, the parties' principal dispute is quite straightforward. In essence, Navient's predecessor, Nellie Mae, created a trust in March 1993, which Nellie Mae used to purchase and fund student loans with tax-exempt bonds. Because the trust had a unique structure, Nellie Mae asked the Department to clarify in a forthcoming DCL whether the loans funded by the trust were entitled to certain government subsidies. In November and December 1993, the Department issued two DCLs which stated that the regulations applicable to the 1993 Trust allowed subsidies for "loans made or purchased, in whole or in part, with funds derived from tax-exempt obligations."¹ All the loans held by Nellie Mae's trust were financed at least in part with funds from tax-exempt bonds, so Nellie Mae relied on the two DCLs' "in whole or in part" language and collected subsidies on the loans. The Department now contends, however, that Nellie Mae's billing practices violated both the Department's regulations and the relevant statutory scheme, despite the language in the two 1993 DCLs.

The relevant facts as jointly stipulated by the parties and included in the administrative record are stated in further detail below.

A. Parties

1. Plaintiff Navient Solutions, LLC is a student loan servicer that services both private and federal student loans. Navient is the successor to Sallie Mae, Inc., which prior to 2004 was part of a government-sponsored enterprise established to provide a secondary market for student loans. Navient is also the successor to Nellie Mae, Inc., which was a student loan lender and servicer acquired by Sallie Mae in 1999.² JSFD ¶¶ 2, 4-5, 20, 44-45.

2. Defendant, the Department of Education, administers and oversees the federal government's student loan programs, including the Federal Family Education Loan Program ("FFELP"). The Department also issues regulations and guidance regarding the Higher Education Act of 1965, the primary statute governing federal student loans. Id. ¶¶ 4-5, 9-10.

3. Defendant Dr. Miguel Cardona is the Secretary of Education, in which capacity he oversees the Department. Id. ¶ 3.

B. The Federal Family Education Loan Program and Special Allowance Payments

4. In administering the FFELP, the Department works with private entities, including Navient, that serve as lenders and secondary-market purchasers of student loans. FFELP loans are generally guaranteed by the federal government to mitigate the risk of default. Id. ¶¶ 5, 8.

5. The Higher Education Act imposes limits on the maximum interest rates that lenders can charge to student borrowers. Because of this, the Higher Education Act also provides that in some circumstances, lenders can receive subsidies called Special Allowance Payments ("SAPs") when the yield on an FFELP loan is less than a statutorily prescribed rate. In this respect, SAPs mitigate the risk that FFELP lenders would otherwise face from fluctuations in interest rates. SAPs also encourage liquidity in the student loan marketplace by ensuring that lenders will receive a return on FFELP loans comparable to market returns. Id. ¶¶ 6-7.

6. Congress amended the Higher Education Act in 1980 to create a unique SAP rate for entities that use tax-exempt financing to fund student loans. This rate, known as a "half-SAP rate," differs from the ordinary SAP rate in two pertinent respects. First, the subsidy is one-half the rate of the usual SAP rate—hence the term "half-SAP." Second, the subsidy is subject to a minimum rate or "floor," which means that the interest rate on the loans can never fall below a 9.5% annualized rate. Because of this, half-SAP subsidies are particularly beneficial when interest rates are low, as the floor in those circumstances guarantees a higher interest rate than lenders would otherwise receive in the market. Id. ¶¶ 12-14; Administrative Record ("AR") 6, 1312.

7. During the 1980s and 1990s, the Department issued shifting regulations regarding the half-SAP subsidy. First, in 1985, the Department issued regulations providing that the Department would cease to pay the half-SAP rate on FFELP loans made or acquired with the proceeds of tax-exempt obligations "after the loan is pledged or otherwise transferred in consideration of funds derived from sources other than a tax-exempt obligation" and the prior tax-exempt obligation is either retired or defeased. This meant that whether a loan was eligible for the half-SAP rate depended on the current source of financing for that loan. 34 C.F.R. § 682.302(e)(3); seealso JSFD ¶ 16; AR 1314.

8. In 1992, the Department issued new half-SAP regulations

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