Ascendium Educ. Sols. v. Cardona
| Docket Number | 22-5104,22-5117 |
| Decision Date | 29 August 2023 |
| Parties | Ascendium Education Solutions, Inc., Appellee v. Miguel A. Cardona, In his official capacity as Secretary of the Department of Education and Department of Education, Appellants |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Argued December 15, 2022
Appeals from the United States District Court for the District of Columbia (No. 1:19-cv-03831)
Steven H. Hazel, Attorney, U.S. Department of Justice, argued the cause for appellants/cross-appellees. With him on the briefs were Brian M. Boynton, Principal Deputy Assistant Attorney General, and Mark B. Stern, Attorney.
Kevin M. St. John argued the cause and filed the briefs for appellee/cross-appellant.
Before: WILKINS, WALKER and PAN, Circuit Judges.
When Congress passed the Higher Education Act of 1965 (the "Act"), 20 U.S.C. §§ 1001-1155, it created the Federal Family Education Loan Program ("FFELP" or "Program"), see id. § 1071-1087-4. The FFELP incentivized financial institutions to lend money to borrowers with poor credit or low incomes by establishing a network of guarantors, which would protect against the risk of those borrowers failing to repay their Program loans. See id. § 1071(a); Bible v. United Student Aid Funds, Inc., 799 F.3d 633, 640 (7th Cir. 2015). When borrowers default on loans issued under the Program, guarantors purchase the loans from the lenders and then try to collect the debts from the borrowers. See Bible 799 F.3d at 640-41. The guarantors, in turn, are reinsured by the federal government. See id.; see also 20 U.S.C. § 1078(c); 34 C.F.R. § 682.404.
The Act permits guarantors to charge some debt-collection costs to defaulting borrowers. See 20 U.S.C. §§ 1091a(b)(1), 1078-6. But in 2019, the Department of Education issued the Rule at issue in this case - 34 C.F.R. § 682.410(b)(2)(i) - which prohibits guarantors from assessing any costs against borrowers who take steps to end their default status within 60 days, by agreeing to repay or to rehabilitate their loans. See Student Assistance General Provisions, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program, 84 Fed.Reg. 49,788, 49,926 (Sept. 23, 2019) (codified at 34 C.F.R. pts. 668, 682, 685).
Ascendium Education Solutions ("Ascendium") is a Program guarantor that previously charged debt-collection costs to defaulting Program borrowers who entered loanrehabilitation agreements. Ascendium challenged the Rule under the Administrative Procedure Act ("APA"), arguing that the Department of Education and its Secretary (collectively, the "Department") did not have statutory authority to promulgate the Rule because the Rule conflicts with the Act. The district court ruled that Ascendium lacked standing to challenge the Rule as it applies to borrowers who enter repayment agreements because Ascendium did not charge such borrowers for any collection costs. But the district court held that the Rule exceeded the Department's authority under the Act with respect to borrowers who enter rehabilitation agreements. Both Ascendium and the Department appealed.
For the following reasons, we conclude that Ascendium has standing to challenge the entirety of the Rule, that the Rule is consistent with the Act and therefore is lawful, and that the Rule is not arbitrary or capricious. Accordingly, we reverse in part and affirm in part the judgment of the district court.
The Program's system of loan guarantees is activated when a borrower enters default.[1] See Bible, 799 F.3d at 64041. Borrowers are in default on their loans when they fail to make payments to their lenders for at least 270 days. 20 U.S.C. § 1085(l). At that point, "the guarantor reimburses the lender for the amount of its loss," 34 C.F.R. § 682.102(g), and the guarantor begins the process of trying to collect the money owed by the borrower, id. §§ 682.102(g), 682.410(b)(6). A guarantor or "guaranty agency" can be a state or a private nonprofit organization. 20 U.S.C. §§ 1078(b), 1085(j).
Within 45 days of taking over a defaulted loan, a guaranty agency must "[a]dvise the borrower that the agency has paid a default claim filed by the lender and has taken assignment of the loan." 34 C.F.R. § 682.410(b)(5)(vi)(A). In that same notice, the guarantor must "[d]emand that the borrower immediately begin repayment of the loan," id. § 682.410(b)(5)(vi)(D), and "[i]nform the borrower of the options that are available to the borrower to remove the loan from default," id. § 682.410(b)(5)(vi)(M), (b)(6)(iv). Additionally, either in that notice or separately, the guaranty agency must "provide the borrower with . . . [a]n opportunity to enter into a repayment agreement on terms satisfactory to the agency," id. § 682.410(b)(5)(ii)(D), and "notify the borrower . . . that if he or she does not make repayment arrangements acceptable to the agency, the agency will promptly initiate procedures to collect the debt," id. § 682.410(b)(6)(ii). Sixty days after providing that required notice, a guaranty agency may begin reporting the borrower's unpaid debt to consumer credit reporting agencies, id. § 682.410(b)(5)(i), (b)(5)(iv)(B); start proceedings to garnish a borrower's federal tax refunds or other government payments, id. § 682.410(b)(6)(v); or bring a civil suit, id. § 682.410(b)(6)(vii). The 60-day period before the guarantor can take those actions is known as the "initial default period."
Borrowers can remove their loans from default in two ways relevant here. First, any borrower can "enter into a repayment agreement on terms satisfactory to the [guaranty] agency." 34 C.F.R. § 682.410(b)(5)(ii)(D). Second, some borrowers can rehabilitate their loans, a process that requires them to make nine timely payments in ten consecutive months. 20 U.S.C. § 1078-6(a); 34 C.F.R. § 682.405(b)(1). The payments must be "[r]easonable and affordable" and may be as low as $5.00. 34 C.F.R. § 682.405(b)(1)(i)(D), (b)(1)(iii). Once a loan is rehabilitated, it is no longer in default and the guaranty agency must sell the loan back to a traditional lender or assign the loan to the Department. 20 U.S.C. § 1078-6(a)(1)(A).
Section 1091a of the Act mandates that the reasonable costs of collecting on a defaulted loan must be passed on to borrowers. It provides: "[A] borrower who has defaulted on a loan made under [the Program] shall be required to pay . . . reasonable collection costs." 20 U.S.C. § 1091a(b)(1). Regulations promulgated by the Department generally place a cap on collection costs. Borrowers may be required to pay the lesser amount of (1) a percent of the average costs for all defaulting borrowers, see 34 C.F.R. § 30.60(c)(1); or (2) what the borrower would be charged if the loan were held by the Department, id. § 682.410(b)(2)(iii). But when a borrower completes a rehabilitation agreement under the Program, "the guaranty agency . . . may, in the case of a sale made on or after July 1, 2014, in order to defray collection costs . . . charge to the borrower an amount not to exceed 16 percent of the outstanding principal and interest at the time of the loan sale." 20 U.S.C. § 1078-6(a)(1)(D)(i).
The challenged Rule precludes guarantors from levying collection costs against defaulting borrowers who enter a repayment plan or rehabilitation agreement during the initial default period, i.e., within 60 days after default. 34 C.F.R. § 682.410(b)(2)(i).
The Rule arose from the Seventh Circuit's decision in Bible v. United Student Aid Funds, Inc., 799 F.3d 633 (7th Cir. 2015). There, a defaulting Program borrower entered into a rehabilitation agreement within the initial default period, completed the required payments, and exited default; yet the agency charged her hefty collection costs. Id. at 638, 645. The borrower sued the guarantor for breach of contract, arguing that the assessment of costs was prohibited by 34 C.F.R. § 682.410(b)(5)(ii)(D), which at the time said that "[t]he guaranty agency, after it pays a default claim on a loan but before it . . . assesses collection costs against a borrower, shall . . . provide the borrower with . . . [a]n opportunity to enter into a repayment agreement on terms satisfactory to the agency." Bible, 799 F.3d at 645-47 (emphasis in original) (quoting 34 C.F.R. § 682.410(b)(5)(ii)(D) (2015)).
The Department was not a party to the case but submitted an amicus brief opining that guaranty agencies could not charge collection costs when a borrower promptly enters a repayment plan or rehabilitation agreement. Bible, 799 F.3d at 639. The Department had taken the same position before the Seventh Circuit several years earlier. See id. at 651. Although the Department had not previously issued guidance with this interpretation, it had taken the position that a guaranty agency "is not required to assess the borrower collection costs" when the borrower "enter[s] into a satisfactory repayment agreement" in the initial default period. J.A. 142 (Department Letter to Guaranty Agency). The Seventh Circuit ruled in favor of the borrower, agreeing with the Department's interpretation. Bible, 799 F.3d at 645. But Judge Flaum noted in a concurring opinion that "perhaps the Department might consider reexamining and revising the language of the regulations" to eliminate all ambiguity. Id. at 663 (Flaum, J., concurring).
In July 2015, the Department followed Judge Flaum's advice. It issued a "Dear Colleague" letter that interpreted the existing statutes and regulations regarding collection costs as prohibiting guaranty agencies from charging collection costs to borrowers who enter a repayment plan or rehabilitation agreement during the initial default period. See J.A. 143-48. Then, in 2017, the Department withdrew that letter...
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