A federal appellate court has revived an Illinois woman’s case that claimed her student-loan servicer actively gave her bad advice on the best way to pay off her debt.
That’s not only a win for the borrower — who’s coping with student-loan debts like millions of other Americans — it’s also possibly the highest court yet to rule on when federal law does and doesn’t override state consumer-protection laws in student-loan litigation, experts say.
The Chicago-based Seventh Circuit Court of Appeals unanimously decided last week that a loan servicer couldn’t allegedly go out of its way to misrepresent repayment options, and then use federal laws to shield itself from state rules barring deceptive business practices.
Borrower Nicole Nelson argued that when her finances turned rocky, she relied on the loan servicer Great Lakes Educational Loan Services to guide her toward the best repayment option. That didn’t happen, she contended.
Judge David Hamilton said servicers can’t argue they’re shielded by federal law if they’re actively deceiving borrowers.
The Great Lakes Educational Loan Services website told viewers it had “expert representatives” on hand who understood all the options. Yet Nelson said servicer representatives allegedly steered her and others away from the types of payment plans that made better financial sense for them,
Great Lakes argued the case was a non-starter because federal laws and regulations set the rules on what servicers are required to tell borrowers about repayment plans, not state laws.
But Judge David Hamilton said servicers can’t argue they’re shielded by federal law if they’re actively deceiving borrowers. He sent Nelson’s class-action case back to the court that dismissed it in December 2017.
“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,” Hamilton wrote.
The ruling didn’t conclude Great Lakes actually led Nelson astray, but Hamilton said the presence of federal laws didn’t block Nelson’s ability to sue under state law.
Student-loan repayments can cut into career plans, getting married, starting a family and even building a nest egg.
Professor David Rubenstein of the Washburn University School of Law said the ruling could bring the clash of state and federal laws on student loans one step closer to the Supreme Court.
“Based on the way things are shaping up, I think there’s a likelihood of a split of authority [with other circuit courts]. And also it’s a very important question,” said Rubenstein. Student loans and their specific terms are “affecting millions of borrowers. It’s a major issue in America right now.”
Americans now owe about $1.5 trillion in student loan debt. For some, the expensive, lengthy repayments can cut into career plans, getting married, starting a family — even building a nest egg for retirement. Those problems are compounded when borrowers are paying more than they can afford.
The decision noted Nelson’s allegations “echo” February findings from a watchdog office inside the U.S. Department of Education. The agency said the Education Department “rarely” held servicers accountable and, as a result, many borrowers could be in overly-expensive repayment plans.
The ruling also comes as various companies are trying to fend off accusations they’ve been steering people to repayment plans that suit sevicers rather than the borrowers. For example, attorneys general in California and Pennsylvania are suing the student-loan giant Navient for allegedly steering borrowers into costly repayment plans. Those cases are ongoing and Navient has previously said the claims are baseless.
Thursday’s ruling “confirms the fact that the state Attorneys General and private borrowers can have their day in court when a servicer lies or makes misrepresentations to student-loan borrowers,” according to Dan Zibel, vice president and chief counsel at the National Student Legal Defense Network.
Zibel argued for Nelson on the appeal and said the ruling drew a “fundamental distinction” between laws “requiring servicers to say something and a law that prevents them from making misrepresentations. …This is the highest court to now weigh in on this question.”
Federal regulators authorized Nelnet’s acquisition of Great Lakes last year. As of December 2018, the two companies managed about 40% of the debts owed on federal student loans. Senators Elizabeth Warren, of Massachusetts, and Cory Booker, of New Jersey, both Democratic presidential candidates, have asked federal officials to take another look at the merger.
In 2018, the Department of Education said federal law supersedes state laws on federal student-loan servicing.
Lawyers representing Great Lakes did not respond to a request for comment. A Nelnet spokesman declined to comment, noting the lawsuit was filed before Nelnet NNI, -0.27% acquired Great Lakes.
In 2018, the Department of Education issued a memorandum saying federal law supersedes all state regulations that could impact federal student-loan servicing. Critics said the memo was an end run around state protections. In the recent Seventh Circuit decision, the judges said in passing they weren’t convinced by the memo’s reasoning.
The Department of Education told MarketWatch it was reviewing the decision and would continue to monitor the case.