WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) has made news by suing student loan service provider Pennsylvania Higher Education Assistance Agency (PHEAA), operating as American Education Services (AES). Accused of illegally hounding borrowers for discharged student loans and providing misleading credit information, the beleaguered PHEAA faces the potential fallout of a federal court order to redress the situation and pay civil penalties.
The initiator of this lawsuit, CFPB director Rohit Chopra, declared that PHEAA had shirked its obligations and unlawfully pursued borrowers. Allegedly, the corporation demanded payments on loans that borrowers no longer owed and disseminated erroneous information to credit reporting bodies.
Based in Harrisburg, Pennsylvania, PHEAA boasts a significant presence in the student loan servicing industry. The public corporation operates under Pennsylvania’s jurisdiction and, as of December 2023, managed student loans worth approximately $17.8 billion.
Under the US Bankruptcy Code, consumers have been given a financial lifeline allowing them to discharge debts and ensuring creditors refrain from collecting on these discharged debts. To acquire this protection, borrowers must initiate a separate process and meet a stricter legal standard than that required for other debts. Certain private student loans are excused in standard bankruptcy proceedings, just like other unsecured consumer debts. These include loans for tuition at institutions that do not qualify for federal Title IV funding, residency loans for medical and dental students, loans for students attending school less than half-time, or loans that exceed the cost of attendance.
AES administers a wide array of private student loans, including those with stringent bankruptcy discharge requirements. Unfortunately, the company treats all student loans as non-dischargeable following a consumer’s bankruptcy discharge, unless a specific court order or instruction from the loan owner indicates otherwise.
In March 2023, the CFPB issued a warning to the industry highlighting this contentious issue. The Bureau found multiple instances of loan servicers illicitly reinstating collections on loans that had previously been discharged by bankruptcy courts.
The CFPB argues that PHEAA’s practices infringe upon the Consumer Financial Protection Act and the Fair Credit Reporting Act’s implementing regulation. Consequently, borrowers are faced with untenable choices—paying a debt they no longer owe or risking credit report damage and default due to alleged non-payment.
According to the CFPB, PHEAA harms consumers by neglecting to identify when loans have been discharged in bankruptcy, illegally collecting on and furnishing inaccurate information about discharged loans, and falsely informing borrowers they still owe payments. Between 2017 and 2021 alone, AES collected or attempted collection on about 7,934 private student loans after bankruptcy procedures. At least 177 of these loans were eligible for bankruptcy discharge. The organization also reported inaccurate data to credit reporting companies that put the financial stability of consumers at risk and may obstruct their ability to secure credit in the future.
This turn of events shines a spotlight on the sometimes murky operations of student loan servicers. As the case progresses, the wider implications for consumers and the loan servicing industry will become clearer. Ultimately, the lawsuit’s outcomes could shape future practices, potentially leading to greater transparency and fairer treatment of borrowers.
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