Ascendium Educ. Solutions, Inc. v. Cardona, Civil Action No. 1:19-cv-03831 (CJN)
| Docket Number | Civil Action No. 1:19-cv-03831 (CJN) |
| Decision Date | 24 February 2022 |
| Citation | 588 F.Supp.3d 7 |
| Parties | ASCENDIUM EDUCATION SOLUTIONS, INC., Plaintiff, v. Miguel CARDONA, Secretary of Education, et al., Defendants. |
| Court | U.S. District Court — District of Columbia |
Kevin M. St. John, Bell Giftos St. John LLC, Madison, WI, for Plaintiff.
Cormac A. Early, Department of Justice, Civil Division, Federal Programs Branch, Washington, DC, for Defendant Betsy Devos, Department of Education.
This case concerns the validity of a federal rule that restricts the holders of defaulted student loans from recouping certain collection costs from borrowers. Defendants have moved to dismiss, see ECF No. 10, and Plaintiff has moved for summary judgment, see ECF No. 13. For the reasons discussed below, the Court grants in part and denies in part both motions.
The Federal Family Education Loan Program was designed to incentivize lending to postsecondary students and their parents who had a lack of collateral or poor credit history.1 Private and public lenders made loans to students or their parents who had low incomes or poor credit histories and would otherwise be priced out of student loans. See 20 U.S.C. § 1078. Instead of those loans undergoing a typical underwriting process, the Program authorized certain nonprofit entities—so-called "guaranty agencies"—to insure the lenders against the risk of default. The Department of Education, in turn, reinsured the guaranty agencies. See 20 U.S.C. § 1078 ; Compl. ¶ 19.
Guaranty agencies are state or private nonprofit institutions that entered into agreements with the Department to serve as the intermediate guarantors. 20 U.S.C. § 1078(j). Guaranty agencies often have independent educational missions, but under the FFEL Program their role is to partner with the federal government to administer the Program, not to profit from their administration of the program. See Ohio Student Loan Com'n v. Cavazos , 900 F.2d 894, 899 (6th Cir. 1990).
At issue in this case are the activities that guaranty agencies are required or are permitted to engage in when a loan made under the FFEL Program enters default. A loan enters default when the borrower fails to make a required payment for 270 days. 20 U.S.C. § 1085(l). At that point, the guaranty agency is required to purchase the loan from the lender, assuming that the lender has satisfied its own various statutory and regulatory obligations. 20 U.S.C. § 1078(c) ; 34 C.F.R. § 682.406(a). Thereafter, the guaranty agency must engage in a number of activities to attempt to collect on the loan, such as notifying the borrower of the debt, offering loan repayment plans, and, at times, reporting the default to credit agencies and commencing litigation. See, e.g. , 20 U.S.C. §§ 1078(c)(2)(A), (G) ; 34 C.F.R. § 682.410(b)(6). A guaranty agency's collection activities must be "at least as extensive and forceful as those generally practiced by financial institutions for the collection of consumer loans." 20 U.S.C. § 1085(f). If the guaranty agency is ultimately unable to recover money from the borrower, the government reimburses the guaranty agency for paying the lender's default claim. 20 U.S.C. § 1078(c)(1)(A) ; 34 C.F.R. § 682.406.
As noted above, a guaranty agency is required to engage in various activities to collect on a defaulted loan that it has purchased from a lender. See, e.g. , 34 C.F.R. § 682.410(b)(6)(i). In particular, within 45 days of paying a lender's default claim, "but before it ... assesses collection costs against a borrower," id. § 682.410(b)(5)(ii), the guaranty agency must, inter alia , send the borrower a written notice stating that the guaranty agency has paid the default claim and that the borrower may request access to the guarantor's records; may seek administrative review of the legal enforceability or past due status of the loan; and may "enter into a repayment agreement on terms satisfactory to the agency," id. §§ 682.410(b)(5)(ii)(A)–(D). The guaranty agency must allow the borrower "at least 60 days from the date the notice ... is sent" to exercise these options. Id. § 682.410(b)(5)(iv)(B).
The guaranty agency is also required to engage in particular "[c]ollection efforts on defaulted loans." 34 C.F.R. § 682.410(b)(6). These efforts include locating the borrower and determining if she has the means to repay the debt, see id. at 682.410(b)(6)(i), and sending the informational notice to the borrower, see id. at § 682.410(b)(6)(ii). Beginning sixty days after the guaranty agency mails the notice to the defaulted borrower, the agency may engage in certain additional activities, such as administratively garnishing the borrower's wages, filing a civil suit to compel repayment, offsetting state or federal tax refunds, and "other lawful collection means to collect the debt." Id. § 682.410(b)(6) ; see also 20 U.S.C. § 1072b(d)(3)(A) (). A guaranty agency may assign some of these more involved and costly activities to a collection agency. See, e.g. , 34 C.F.R. § 682.410(b)(9)(i)(T)(1).
Under the rule challenged here, within the initial sixty-day period following the notice of default, borrowers have two ways to avoid the need for guaranty agencies to undertake additional steps once the sixty days are up. 34 C.F.R. § 682.410(b)(2). First, the borrower can enter into a "repayment agreement" on terms negotiated by the guaranty agency. Id. § 682.410(b)(5)(ii)(D). If a borrower enters into such an agreement within the first sixty days and meets her obligations under the agreement, additional collection activities are unnecessary. See id. § 682.410(b)(5)–(9). Second, a borrower may enter into a "loan rehabilitation agreement," the terms of which are largely dictated by statute and regulation. See 20 U.S.C. § 1078-6 ; 34 C.F.R. § 682.405. Such agreements require the borrower to make nine "reasonable and affordable" monthly payments on the loan within a ten-month period. 20 U.S.C. § 1078-6(a)(1). Once the payments are made, the agency must either "sell the loan to an eligible lender" or, if unable to do so, assign the loan to the Secretary. Id. § 1078-6(a)(1)(A). At that point the loan is "rehabilitated." The loan exits default and the borrower is once again subject to the same terms and conditions on the loan as if he or she had never defaulted. Id. § 1078-6(a)(4).
The statute mandates that "a borrower who has defaulted on a loan made under [the FFEL Program] shall be required to pay, in addition to other charges specified in this subchapter[,] reasonable collection costs[.]" 20 U.S.C. § 1091a(b)(1). Prior to the issuance of the rule challenged here, the Department's regulations explained that:
[T]he guaranty agency shall charge a borrower an amount equal to reasonable costs incurred by the agency in collecting a loan on which the agency has paid a default or bankruptcy claim. These costs may include, but are not limited to, all attorney's fees, collection agency charges, and court costs.
34 C.F.R. § 682.410(b)(2) (2018). With respect to borrowers who enter into loan rehabilitation agreements, the statute provides that when a guaranty agency has secured all of the nine required payments and sells the loan to a lender, it "may ... 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)(II). Here, both parties assert that, provided a guaranty agency is permitted to charge any collection costs under this provision, the guaranty agency may charge the full 16 percent on rehabilitated loans.
Although the FFEL Program was discontinued for new loans beginning in 2010, student borrowers remain obligated under loans made before 2010, and lenders, guaranty agencies, and the government continue to service such loans. In 2015, the government filed an amicus brief in the Seventh Circuit addressing the question of whether a guaranty agency can assess collection costs against a defaulted borrower who timely enters into a rehabilitation agreement and complies with that agreement. In that brief, the government explained its view that guaranty agencies could not charge collection costs in these circumstances because the regulations did not allow guaranty agencies to engage in collection activities against such borrowers. See Brief of the United States as Amicus Curiae in Support of the Appellant and Reversal, Bible v. United Student Aid Funds, Inc. , No. 14-1806 (7th Cir.), Dkt. 34, at 9.2 The Secretary subsequently issued a "Dear Colleague" letter taking the same position. See "Dear Colleague" Letter from Lynn B. Mahaffie, Assistant Secretary for Policy, Planning, and Innovation, Office of Postsecondary Education, U.S. Dep't of Education, July 10, 2015 ("2015 Letter").
Two years later, the Secretary rescinded its 2015 Letter, finding that the "position set forth" in that letter "would have benefitted from public input on the issues discussed." The Department committed not to require compliance with the 2015 Letter's interpretation "without providing prior notice and an opportunity for public comment." "Dear Colleague" Letter from Lynn B. Mahaffie, Acting Assistant Secretary, Office of Postsecondary Education, U.S. Dep't of Education, March 16, 2017.
In June 2017, the Department began a negotiated rulemaking process to consider a number of topics relating to FFEL loans, including the issue of guaranty agency collection costs. See 82 Fed. Reg. 27640 (June 16, 2017) ; see also 82 Fed. Reg. 41194, 41196 (Aug. 30, 2017). The relevant...
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Ascendium Educ. Sols. v. Cardona
...the merits. The district court decided the motions at the same time, granting both in part. See Ascendium Educ. Sols., Inc. v. Cardona, 588 F.Supp.3d 7, 10 (D.D.C. 2022). The court determined that Ascendium lacked standing to challenge the Rule as it applied to borrowers who entered repayme......