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Student Loan Law: 18.4.7.4 The FTC Act and FTC Guides for Private Vocational and Distance Education Schools
There is no private right of action under the Federal Trade Commission Act (FTC Act).491 Thus, while the FTC has issued guides concerning unfair and deceptive private vocational and distance education school practices,492 there is no private cause of action for violation of the guides. On the other hand, a violation may lead to a state UDAP claim or other cause of action that does provide for a private right of action.493
Student Loan Law: 18.3.4.3 Conflict Preemption
Conflict preemption may arise under two circumstances—from a direct conflict between state and federal law, such that compliance with both is impossible (sometimes called “direct conflict preemption”), or because a state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” (often called “obstacle preemption”).324
Student Loan Law: 18.4.10.1 Intentional Torts
Common law fraud and other intentional torts are potential claims to consider against predatory schools because school abuses often involve fraudulent or intentional misrepresentations as well as the possibility of punitive damages.574 Fraud claims, however, may be difficult for students to prove and the standards are typically much harder to satisfy than those for UDAP laws.
Student Loan Law: 18.4.2 Schools As Private Lenders
Student claims against schools are not restricted to their misconduct as sellers and providers of education.387 These school-originated private loans, often referred to as institutional loans, may be structured as retail installment sales contracts, revolving loan agreements, or promissory notes.
Student Loan Law: 18.4.5 Deciding Between Class and Individual Actions
An individual action is one way to pursue a predatory school case. A second, and often more efficient, approach is to join a number of individual students as plaintiffs. Sometimes it is easier to obtain punitive damages on behalf of a limited number of students than on behalf of a class.
Student Loan Law: 18.4.14 Collecting on a Judgment
A major obstacle to affirmative litigation against schools is that, in many cases, the school will close before the consumer can collect on a judgment.612 This is especially a problem in cases against smaller schools that are not part of a large corporation. One approach is to raise school-related claims and defenses against the entity holding the loan.613 There are also other avenues for recovering a judgment against the school.
Student Loan Law: 18.5.1 Scope of This Section
This section examines two types of litigation involving private student loan lenders. The first type of litigation involves borrowers’ ability to raise school-related claims and defenses against a private student loan lender.626 This is an important litigation area, particularly where a for-profit school has engaged in abusive practices. Raising school-related claims and defenses against the lender means the borrower does not have to bring an independent action against the school.
Student Loan Law: 18.5.2.2 FTC Holder Rule Allows Students to Raise School-Related Claims and Defenses
The Federal Trade Commission’s Rule on Preservation of Consumer Claims and Defenses630 (FTC Holder Rule) is the most direct route allowing a student to raise school-related claims and defenses against repayment of a private student loan. Detailed analysis of the operation of the FTC Holder Rule is found in NCLC’s Federal Deception Law.631 This section summarizes its key features and its applicability to for-profit schools with respect to private student loans.
Student Loan Law: 2.6.1 Introduction
The Higher Education Act (HEA) sets interest rate limits for federal student loans. Prior to July 1, 2006, the rates for most student loans were variable with an upper limit of 8.25%.154 The variable-rate era, at least for now, ended on July 1, 2006.
Student loan interest rates have become a hot political issue, leading to multiple legislative changes since the end of the variable-rate era. As a result, borrowers with the same loans may have different fixed rates depending on the year the loans were taken out.
Student Loan Law: 18.4.6.2 Where Arbitration Agreements Are Not Restricted
The Department’s rule restricting arbitration agreements does not apply to schools that are not participating in the Direct Loan Program. It also does not apply to claims that do not relate to the making of a federal student loan or the provision of educational services for which the loan was obtained. For example, it likely would not relate to a student’s claim concerning the terms or misrepresentations about a private loan the student received from the school, and where that loan agreement contained an arbitration clause.
Student Loan Law: 18.5.6.2 Arbitration’s Effect on Classwide Relief
The most serious implication of an arbitration requirement is its limitation on a student’s ability to seek classwide relief. In deciding whether classwide relief is available against the school or lender, the first step is to determine whether the agreements entered into by members of the prospective class contain an arbitration clause. The Federal Arbitration Act does not require arbitration of disputes, it only requires enforcement of validly consummated agreements to resolve disputes through arbitration.
Student Loan Law: 17.3.2.9 Private Loan Borrowing and Internal Loan Products
Private loans are a relatively risky and expensive way to finance college. Private student loan volume peaked in 2007–2008, when 42% of all for-profit school students had private loans.517 That number sharply decreased with the financial crisis.
Student Loan Law: 18.5.2.4.2 When the school is the originating lender
There is no question of the loan holder’s liability when the school is the originating creditor that assigns the loan.644 UCC Article 9—adopted in all fifty states—makes the omitted FTC Holder Notice part of the contract as a matter of law, allowing the borrower to utilize the notice as if it were included.645 Moreover, under the basic law of assignment, the assignee loan holder steps into the shoes of the assignor school and is subject to all school-related defenses.
Student Loan Law: 16.2.1 Comparing Private Loans and Federal Loans
Private loan terms and conditions, including interest rates and fees, are generally determined by an individual’s or a co-signer’s credit history. Thus, low-income students and/or those with negative credit histories are more likely to receive loans on less favorable terms, particularly if the co-signer also has a marginal credit rating.
Student Loan Law: 2.8.1 Introduction
The Truth in Lending Act (TILA) does not apply to student loans made, insured, or guaranteed by the United States or a state guaranty agency under the provisions of Title IV of the Higher Education Act (HEA).212 All forms of federal student loans are also exempted from state disclosure laws.213 However, the HEA does have disclosure requirements that apply to federal student loans, as discussed in this section.
Student Loan Law: 16.4.1.1 Generally
The Truth in Lending Act (TILA) and Regulation Z interpreting TILA set out special disclosures applicable only to private student loans. The disclosures were extensively amended, effective February 14, 2010.144 TILA also sets out a number of substantive requirements for private student loans.
Student Loan Law: 16.4.1.4.1 Application disclosures
The application or solicitation disclosures must include information about interest rates.
Student Loan Law: 16.4.1.3 Timing of Disclosures
There are three sets of required disclosures: (1) application and solicitation; (2) loan approval; and (3) final and separate timing provisions for each.
The application or solicitation disclosures may be provided on or with the application or solicitation.168 The term “solicitation” is defined as an offer of credit that does not require the consumer to complete an application. This also includes a “firm offer of credit” as defined in the Fair Credit Reporting Act.169
Student Loan Law: 18.5.4.2 Usury and Other State Credit Claims
Private student loans must comply with applicable state usury limits. Usury claims are specifically preempted in federal student loan cases,711 but not in private student loan cases. When the private student loan lender is not a federally insured bank or other federally insured depository, the lender’s interest charges must comply with the state usury law where the student resides or the loan is made.
Student Loan Law: 16.4.1.2 TILA Definitions and Scope
For non-mortgage loans, TILA generally exempts credit transactions with an amount financed over a certain dollar threshold (in 2023, the threshold was $66,400, and it is adjusted annually for inflation).149 This exemption does not apply to private education loans, so that “private education loans” in any amount are covered.150
Student Loan Law: 18.5.4.1 UDAP Claims
State unfair and deceptive acts and practices (UDAP) laws are well-suited for challenging misrepresentations and over-reaching tactics by lenders, except in those states where the statute does not apply to lending or where banks or other financial institutions are exempted.704
Student Loan Law: 8.4.1 Introduction
This section addresses collection fees and penalties assessed on borrowers with loans in default, including statutory and regulatory limitations on such fees. It also includes a discussion of subregulatory collection fee practices and policies that were in place prior to the student loan payment pause. However, as of April 2023, it is unclear how the Department’s collection fee policies and practices will change when collection resumes for the first time since the Department terminated its contracts with private collection agencies in 2021.
Student Loan Law: 18.2.3.2 FDCPA Violations Involving Private Student Loans
Agencies collecting private student loans may try to take advantage of borrower confusion about the different types of loans.