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Student Loan Law: 8.4.5 Other Potential Fees and Penalties

In some cases, the United States—or private attorneys hired by the United States to collect on student loans—attempt to collect court filing fees and penalties in addition to attorney fees and collection costs.215 Because such collection actions are usually uncontested, those fees are rarely questioned. The reality is that the United States may lack statutory authority to collect these amounts.

Student Loan Law: 8.5.1.1 Generally

Historically, the Department has turned over almost all defaulted student loans it holds to private collection agencies (PCAs). However, in November 2021, the Department terminated its contracts with PCAs.222 The Department has long-term plans to handle post-default loan servicing and collection under a new, unified servicing approach.223 In the meantime, the Department has temporarily contracted with Maximus Federal Servicers, Inc.

Student Loan Law: 18.5.2.3 When the Loan Agreement Contradicts the FTC Holder Notice

Of the private loan notes surveyed in one report, 90% of the notes that included the FTC Holder Notice also had language attempting to undermine it in some way.640 In most cases, these contradictory clauses stated that, if the student is dissatisfied with the school or fails to complete the course, the student still must repay the note in full. This directly contradicts the FTC Holder Notice, which explicitly allows borrowers to raise claims related to school closure or other school-related claims against loan holders.

Student Loan Law: 18.5.2.4.1 Overview

Of the private student loans surveyed in one report, nearly 40% of private student loans did not include the FTC Holder Notice. In many of these loans, the Holder Rule required inclusion of the notice. The notice is required whenever the school has a referral or other business relationship with the lender.

It is counter-intuitive that a lender would be in a stronger position by violating a federal requirement than it would be by complying with it. But the failure to include the notice does complicate the question of the loan holder’s liability for school misconduct.

Student Loan Law: 8.5.1.2 Commission Structure Fosters Abuses

Many of the problems involving private collection agencies (PCAs) stemmed from the government’s collector compensation system. Under the contract with the Department, PCAs received the highest commission rate if the borrower completed a loan rehabilitation.

Student Loan Law: 8.5.2 Submitting Complaints About Post-Default Collections

Unlike Department-held loans, guaranty agencies that hold FFEL Program loans may still contract with private collection agencies (PCAs) for post-default collection. If a guaranty agency holds a loan, the first place to complain about collection agency misconduct is the state guaranty agency. If the collection misconduct is by an employee of the guaranty agency, it is best to contact an official at a higher level of the agency.

Student Loan Law: 8.6.3.3.2 Exceptions to the rule barring laches

A few courts have been willing to look beyond the traditional rule that the doctrine of laches is inapplicable against the United States. In a 1985 non-student-loan case, S.E.R. Jobs for Progress, Inc. v. United States, the court noted that some relaxation of the principle that laches is not a defense against the government may be developing and that exceptions to the rule might be approved in certain cases.313

Student Loan Law: 18.5.3.1 The Truth in Lending Act

Federal student loans are exempt from the Truth in Lending Act’s (TILA) disclosure requirements.667 However, this exemption does not apply to private student loans—and only applies to government student loan programs promulgated under the Higher Education Act.668 As a result, private student loans must comply with TILA disclosure requirements, as described in detail in NCLC’s Truth in Lending.669

Student Loan Law: 18.5.3.3 Military Lending Act

The Military Lending Act (MLA) contains a 36% annual percentage interest rate cap for consumer credit extended to active duty military and their dependents.695 The regulations set out rules as to when certain fees and charges are treated as finance charges in computing the allowable annual percentage rate.696 The MLA defines consumer credit to include private student loans and provides private remedies for violations.697

Student Loan Law: 18.5.3.4 Anti-Trust Claims

In a federal district court case, the plaintiffs’ claims of illegal restraints on trade and illegal monopolization survived a motion to dismiss.698 The plaintiffs alleged that a private student loan lender and the dean of a for-profit law school conspired to reduce or eliminate competition for private student loans, preventing the school from working with other private student lenders.

Student Loan Law: 18.5.4.3 Other State Claims

Common law claims, including breach of contract and fraud-related claims, ordinarily are not preempted even when the lender is a federally chartered bank.721 When state law provides a cause of action for declaratory relief, a borrower may bring an action seeking declaration that the borrower has no contractual obligation to the loan holder.722 Such an action could be based on identity theft, the loan holder’s inability to provide a promissory note, or the loan’s holder’s inability to documen

Student Loan Law: 18.5.6.1 Generally

Clauses requiring consumers to arbitrate their disputes are pervasive in consumer agreements, including those involving private student loans.728 Private student loan lenders use arbitration agreements to immunize themselves from classwide litigation, both in court and in arbitration. This section briefly summarizes issues of special relevance to the enforcement of such clauses in private student loans.

Student Loan Law: 18.5.6.3 Initial Steps to Challenge an Arbitration Agreement

The first step in challenging an arbitration agreement is to identify the agreement. If the defendant cannot produce the agreement, then there can be no arbitration requirement. The next step is to determine if the arbitration agreement requires that the determination of the agreement’s enforceability be delegated to the arbitrator (a so-called “delegation clause”). If there is no delegation clause, the court determines the arbitration requirement’s enforceability.

Student Loan Law: 18.5.6.4 Grounds to Challenge an Arbitration Agreement

The Military Lending Act (MLA) prohibits arbitration requirements for consumer credit entered into by those on active military duty or their dependents.735 This applies to private student loans, and the MLA provides private remedies for violations, including making the agreement void.736 A standard form agreement as applicable to those on active duty or their dependents can include an arbitration clause as long as that clause explicitly exempts from its terms where the consumer is active dut

Student Loan Law: 18.5.7 Raising Claims Against an Assignee of the Originating Lender

When the school is the originating lender, the FTC Holder Rule allows the borrower to raise against any assignee affirmative claims relating both to the school’s conduct and the school’s lending practices. Matters are more complicated where a third-party lender originates the loan. This is of practical significance because private student loans are often sold on the secondary market and it will likely not be the originating lender who is holding the loan.

Student Loan Law: 18.5.8 Forum Selection Clauses

All the private student loan promissory notes in one study included a provision that any actions initiated by the lender or consumer would have to be filed in the lender’s home state.756 The law may treat these provisions differently depending on whether the lender (or its assignee) is suing the borrower or the borrower is suing the lender.

Student Loan Law: 8.6.4.3 Raising Defenses When FFEL Program Loans Have Lost Their Guaranteed Status

A loan issued under the FFEL Program may lose its guaranteed status if a lender does not exercise due diligence, if the school was not an eligible institution, or for certain other reasons. While the promissory note between the lender and student will not be automatically cancelled, the guaranty agency and the United States no longer back up the loan. Typically, the lender will sell the loan to a private entity and that entity (not a guaranty agency) will try to collect from the borrower on the loan.

Student Loan Law: 8.6.4.4 Raising Defenses After a Loan Has Been Consolidated

A loan consolidation has significant benefits for most student loan borrowers in default.355 However, one problem is that consolidating a student loan may make it more difficult to raise defenses to collection on that loan in litigation. The lender may argue that the new consolidated loan is a novation and that defenses to the old loan do not apply to the new loan.

Student Loan Law: 8.6.4.5 Defenses for Servicemembers

The Servicemember Civil Relief Act (SCRA) limits collection tactics and enforcement of claims against active duty military personnel.358 To be entitled to the SCRA’s protections, the servicemember must either be in or recently released from military service. “Military service” is defined in part as active duty.359