New York v. Pa. Higher Educ. Assistance Agency

PEOPLE OF THE STATE OF NEW YORK, by Letitia James,Attorney General of the State of New York, Plaintiff, v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY,d/b/a FEDLOAN SERVICING and AMERICAN EDUCATION SERVICES, Defendant.

19 Civ. 9155 (ER)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

May 1, 2020

OPINION & ORDER

RAMOS, D.J.:

This case concerns the administration of the student loans serviced by the Pennsylvania Higher Education Assistance Agency ("PHEAA"). According to the New York Attorney General ("NYAG"), who brings this suit, PHEAA, the exclusive servicer of loans in the Public Service Loan Forgiveness program, engages in unfair, deceptive, and abusive practices in violation 12 U.S.C. § 5531 (Dodd-Frank), fraud and repeated and persistent illegal conduct in violation of New York's Executive Law § 63(12), and deceptive acts and practices in violation of New York's General Business Law § 349. PHEAA moves to dismiss NYAG's claims, arguing that (1) it is entitled to derivative sovereign immunity under Yearsley v. W.A. Ross Const. Co., 309 U.S. 18 (1940); (2) the claims are barred under the doctrine of intergovernmental immunity; (3) the claims are not ripe for adjudication; (4) the state law claims are preempted by the Higher Education Act ("HEA"); and (5) the NYAG has failed to join the U.S. Department of Education ("DOE"), which it argues is a necessary and indispensable party under Fed. R. Civ. P. 19. PHEAA also claims that the NYAG is not entitled to pursue civil penalties under the Consumer Financial Protection Act.

For the forgoing reasons, PHEAA's motion is GRANTED in part and DENIED in part.

I. FACTUAL BACKGROUND

The following facts are taken from the Complaint and are presumed to be true for purposes of deciding this motion.

A. PHEAA

PHEAA is a large student loan servicer, which services approximately 20 percent of the nation's student debt, including the loans of tens of thousands of New York residents. (Compl. ¶¶ 32, 35). It operates under the names FedLoan Servicing ("FedLoan") and American Education Services ("AES"). (Id. ¶ 7.) FedLoan services direct loans (loans made directly by the federal government) and loans made by the (now-discontinued) Federal Family Education Loan Program ("FFEL") that are owned by the federal government. (Id.) AES services private loans and FFEL loans owned by private entities. (Id.)

B. PSLF and IDR Plans

The NYAG's claims focus on, though do not necessarily exclusively pertain to, two programs that PHEAA administers, the Public Service Loan Forgiveness Program ("PSLF") and income-driven repayment ("IDR") plans.

PSLF was established by Congress in 2007. (Id. ¶ 2.) Its aim is to encourage students to work in public service jobs, which are frequently low-paying, by offering student loan forgiveness to those who make 120 monthly payments, while working full-time for a qualifying public service employer. (Id. ¶ 62-64.) Given the terms of the program, fall 2017 was the earliest any borrower could have completed the 120 qualifying payments requirement and seek loan forgiveness under the program. (Id. ¶ 73.) As of June 2019, more than 90,000 borrowers applied for loan forgiveness throughPSLF, but only approximately one percent had their loans discharged.¹ (Id. ¶ 75.) PHEAA has an exclusive contract with the U.S. Department of Education ("DOE") to service loans of borrowers seeking PSLF. (Id. ¶ 8.)

IDR plans also allow for loan forgiveness. IDR plans are meant to assist borrowers who are struggling financially avoid delinquency and default. (Id. ¶17.) IDR plans lower monthly payments based on income and household size, and allow for the borrower's remaining loan balance to be forgiven if the borrower makes payments for a specified period, typically twenty or twenty-five years. (Id. ¶¶ 17, 53, 201 n. 24.)

C. PHEAA's Alleged Conduct

In this action, the NYAG does not challenge the terms of the loans at issue, the statutes or regulations governing student loans, nor the policies of the Department of Education. Rather, the Complaint focuses on PHEAA's administration of the loans it services, asserting that PHEAA provides borrowers with incorrect and misleading information with regards to the loans it services. According to the Complaint, PHEAA's "deceptive, unfair, and abusive conduct . . . is a significant contributor" to the low PSLF approval rate. (Id. ¶ 75.) Broadly speaking, the Complaint charges PHEAA with four types of wrongdoing:

1. PHEAA Provides Borrowers With Inaccurate Information Leading to Undercounting and Delays in Loan Forgiveness

The NYAG alleges that PHEAA provides borrowers with incorrect information about their loans. For example PHEAA is responsible for determining whether a borrower's payment counts towards the 120 needed for PSLF loan forgiveness (payments must be made on-time, for the full amount, and while the borrower is enrolled in an eligible loan repayment plan and working full-time for a qualified employer), but frequently misrepresents to borrowers the number of PSLF-qualifying payments they have made. (Id. ¶¶ 68, 76-112.) Among the reasons for this misrepresentation is that PHEAA relies on inaccurate processes, lacks quality control mechanisms to ensure its information is correct, and fails to locate missing records (Id. ¶¶ 91-96, 103, 111.) PHEAA's processes leads to undercounting the number of PSLF-qualifying loans a borrower has made, which causes improper denials of loan forgiveness applications, delays loan forgiveness, and prolongs the time that borrowers are in repayment. (Id. ¶¶ 116, 124.)

PHEAA also allegedly miscalculates the amount of the monthly payment borrowers must make under IDR plans, sometimes by hundreds of dollars. (Id. ¶¶ 180, 183-190.) While borrowers may be able to consult online calculators for estimates, PHEAA is responsible for making the ultimate payment amount calculation. (Id. ¶ 179.) Borrowers who have applied for IDR plans are typically those who already have difficulty making payments, and inaccurately high bills force borrowers to choose between trying to make a payment that is far more than they are actually required to make, loan delinquency, or requesting a forbearance (a period in which no payment is due while PHEAA resolves its mistakes), but which increases costs on borrowers sometimes by hundreds or thousands of dollars and can delay forgiveness. (Id. ¶¶ 178, 191-205.)

2. PHEAA Delays in Providing Borrowers Information and Processing Paperwork, Further Delaying Forgiveness

The Complaint also alleges that PHEAA delays in providing borrowers with information and processing paperwork. For example, the Complaint alleges that PHEAA can take many months, and sometimes over a year, to provide explanations to borrowers for PSLF payment count determinations, and on occasion, never does. (Id. ¶¶ 128-156.) These delays harm borrowers because they may be unable to rectify the conditions that disqualify their payments, delaying their ability to obtain forgiveness, and may cause them to leave the program. (Id. ¶¶ 159-170.)

PHEAA also allegedly fails to timely process paperwork with respect to IDR plans. (Id. ¶¶ 175-200.) For example, it delays so long in recertifying applications (a yearly process in which borrowers verify that they continue to need the IDR plan) that borrowers are dropped from their IDR plans, even though they applied for recertification on time. (Id. ¶¶ 177, 181-182, 206-220.)

3. When Contacted, PHEAA's Provides Borrowers with Incorrect Information Further Reducing the Likelihood and Timing of Forgiveness

Moreover, when borrowers contact PHEAA for assistance, they are often provided with incorrect information. (Id. ¶¶ 222-276.) For example, some borrowers whose payments PHEAA determines to be ineligible for PSLF are told, incorrectly, that there is no way to appeal these decisions. (Id. ¶¶ 268-275.) Borrowers who feel that it is impossible to challenge errors and that PSLF is out of reach, may also give up on the program altogether. (Id. ¶ 115.) PHEAA also tells some borrowers that payments made during forbearance cannot qualify for loan forgiveness, while it allows exceptions for borrowers who persist in challenging that determination. (Id. ¶¶ 217 and n. 28, 237.)

Further, PHEAA misrepresents information concerning benefits available to borrowers with cancer. (Id. ¶¶ 316-324.) Since September 2018, borrowers with cancer are entitled, by statute, to suspend their loan repayment. (Id. ¶ 316.) But borrowers whoqualify for this program have falsely been told that law is not yet in effect or that the borrower does not qualify for the deferment. (Id. ¶¶ 317-318.) Borrowers with cancer, therefore, have been unable to defer payment, and have often had to struggle to repay loans while seeking treatment. (Id. ¶ 320.)

4. Forbearance and Consolidation Steering

Lastly, the Complaint alleges that PHEAA attempts to steer struggling borrowers into forbearance or consolidation, options that are economically beneficial to PHEAA, rather than into IDR plans that can offer lower monthly payments. (Id. ¶¶ 277-315.) Forbearance and consolidation also have negative effects on a borrower's ability to achieve forgiveness and add costs. While a borrower need not make payments during forbearance, interest continues to accrue, adding hundreds or thousands of dollars to the costs of the loan. (Id. ¶¶ 193-195.) Moreover, if a borrower nonetheless decides to make payments during forbearance, those payments do not automatically count towards PSLF and IDR forgiveness. (Id. ¶ 202.) Consolidation, instead, may make a borrower's payments ineligible for PSLF entirely. (Id. ¶ 303.)

With respect to forbearance, the NYAG alleges simply that PHEAA "misrepresents the options available to struggling borrowers by often failing to mention the option to enter IDR and instead steering borrowers into forbearance." (Id. ¶ 287; see also id. ¶ 18.) The Complaint's allegations with respect to consolidation are more robust. For example,...