On Friday, the Consumer Financial Protection Bureau (CFPB) filed a new lawsuit against the Pennsylvania Higher Education Assistance Agency (PHEAA) for unlawfully collecting payments that borrowers no longer owe, as they were discharged through bankruptcy.
This is the second lawsuit filed by the CFPB against PHEAA in May, an earlier one accused the servicer from failing to respond to borrowers seeking relief from payments. PHEAA, which operates nationally as American Education Services (AES)—one of the largest private loan servicers in the country, is currently embroiled in multiple lawsuits concerning its student loan management practices.
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The complaint filed in federal court in Pennsylvania states: "PHEAA fails to recognize that some private student loans are discharged in bankruptcy," and the Harrisburg based servicer, "lacks policies and procedures to identify which private loans it services have been discharged by a bankruptcy court's Order of Discharge."
Discharging a private student loan can be challenging since the U.S. bankruptcy code applies differently than it does to other types of unsecured debt, such as medical or credit card debt; however, it can be done.
Issued by private lenders, private student loans don't qualify for the Biden administration's federal student loan forgiveness plan or repayment plan options. The expected increase in federal student loan interest rates do not apply to private loans. According to the Education Data Initiative, the average private student loan debt is about $55,000 per borrower.
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In a press release on Friday, CFPB Director Rohit Chopra said, "PHEAA has ignored its responsibilities and illegally pursued borrowers for loans they no longer owe."
Newsweek has reached out to CFPB for comment via email on Saturday.
The CFPB claims that between 2017 and 2021, "at least 177 were loans eligible for discharge in bankruptcy," reiterating that "borrowers were thus subjected to illegal collections on loans they did not owe." The servicer also failed to inform borrowers, which the CFPB believes was exemplified by sending "inaccurate and misleading repayment letters and billing statements to borrowers who no longer have any financial obligation to pay the discharged debts."
In addition to failing to discharge certain loans, CFPB alleges that "AES also furnishes inaccurate information to credit reporting companies regarding borrowers' outstanding debt." Inaccurate credit reporting can cause "financial harm to consumers and may make it harder to qualify for other credit in the future," the bureau says.
In a statement sent to Newsweek on Sunday afternoon, PHEAA said: "PHEAA strives to conduct all our student loan servicing activities in full compliance with all laws, rules, and regulations. We continue to disagree with any assertion that PHEAA's handling of bankruptcy matters has been inconsistent with the Bankruptcy Code or the orders of the Bankruptcy Courts. The Bankruptcy Code does not fall within the federal laws listed by Congress over which the CFPB has oversight, and this is another example of regulatory overreach by the CFPB. This issue comes down to a matter of interpreting bankruptcy law."
Its statement concluded: "The accusation that PHEAA knowingly acted in a way that was contrary to the law is absolutely inaccurate and PHEAA will defend itself vigorously through the legal process."
Read more: Federal PLUS Student Loans Review
According to CFPB, as of December 2023, PHEAA was managing a student loan portfolio valued at approximately $17.8 billion.
Update, 6/2/24 at 3:45 p.m. ET: This article has been updated to include a comment from PHEAA.
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Mandy Taheri is a Newsweek reporter based in Brooklyn. She joined Newsweek as a reporter in 2024. You can get ... Read more
