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Student Loan Law: 18.3.1 Servicing Abuses Described

Regardless of whether a student loan is a Federal Direct Loan, a private student loan, or an older FFEL Program loan, an entity (often not the note holder itself) will service the loan—e.g., receive payments, apply interest and other charges, compute the outstanding balance, answer borrower queries, and advise about payment options.

Student Loan Law: 18.4.1 Introduction

This section focuses on pursuing consumer protection claims and related causes of action against schools. Such claims may relate to school advertising, recruitment or enrollment practices, breaches of promises, failures to provide required disclosures or refunds, and more. Additionally, when schools act as lenders—i.e., making their own institutional loans to their students—various lending-related claims may be available.379

Student Loan Law: 18.2.8 Mandatory Arbitration of Debt Collection Claims

Mandatory arbitration is a matter of contract law—without an agreement by the student loan borrower to submit disputes to arbitration, there is no binding arbitration requirement. Federal Direct Loans, FFEL Program loans, and other federal student loans do not include arbitration clauses, and servicers or collectors on those loans do not seek to add an arbitration requirement after the loans are originated. As a result, there can be no mandatory arbitration concerning collection claims involving federal student loans.

Student Loan Law: 18.3.7 Arbitration Requirements

Mandatory arbitration is a matter of contract law—without an agreement by the student loan borrower to submit disputes to arbitration, there is no binding arbitration requirement. Federal Direct Loans, FFEL Program loans, and other federal student loans do not include arbitration clauses, and servicers on those loans do not seek to add an arbitration requirement after the loans are originated. As a result, there can be no mandatory arbitration of servicing claims involving federal student loans.

Student Loan Law: 18.3.6.1 Enforcing the Higher Education Act

Courts consistently find no direct private right of action under the HEA.364 Borrowers may be able to raise HEA violations in state UDAP actions or through common law breach of contract claims.365 The HEA standards are relevant to claims against servicers of federal loans, but not private student loans.

Student Loan Law: 18.4.7.1 The Higher Education Act

Litigation involving schools may involve violations of the Higher Education Act (HEA) standards, including violations of the HEA misrepresentation regulations.462 Nevertheless, the vast majority of courts find that there is no implied private right of action under the HEA.463

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: 18.3.3.1 Breach of Contract Claims

Federal Direct Loan borrowers may be able to bring breach of contract claims against servicers by arguing that they are third-party beneficiaries of the Department’s contracts with the Direct Loan servicers.246 Borrowers may also be able to raise direct breach of contract.247

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: 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.