Washington -- Ten years ago I filed suit in federal court on behalf of the United States to recover taxpayer funds claimed illegally by nine financial institutions, all student loan lenders and servicers. Over the years, this action has resulted in the return of over $70 million of taxpayer money to the U.S. Treasury.
As of 2016, of the nine financial institutions sued, seven have paid money back in settlements. The eighth dropped out of the suit because it was found by the court to be an arm of the state of Arkansas and thus exempt under the doctrine of sovereign immunity. This was no great loss to the suit, as the lender had already paid back several million voluntarily and the remaining issue was whether the lender had actually paid back all it owed.
So with a record of 7-0-1, the last case went to a federal jury trial this November against PHEAA, a Pennsylvania financial institution. PHEAA told the jury that it had thought its billings were legal, because the Department of Education paid them. Evidence presented at the trial also showed that PHEAA considered the Department "pathetic" and "weak-minded," and that a subsequent finding by Secretary Margaret Spellings (who restated regulations making clear the claims has never been legal), was a "joke." The jury could not overcome the fact that the Department had indeed paid the claims.
Which brings us to an overall record of 7-1-1, thanks to a remarkable effort by my counsel in the case, the team of lawyers at Wiley Rein (and, through 2010, the TELG law group). Even getting the PHEAA case to trial required a Wiley Rein victory at the U.S. Supreme Court, which confirmed a 4th Circuit ruling that PHEAA could not use sovereign immunity as a means to avoid a jury trial. This victory allowed a student loan borrower in a companion case, Pele v. PHEAA, to sue and separately settle with PHEAA under the Fair Credit Reporting Act. This had previously been impossible.
The effort to clean up the nation's student loan mess now moves into a new phase, as it must. Total student loan debt outstanding has surpassed $1.4 trillion. Far too many borrowers, victimized by shoddy for-profit schools and predatory lenders, cannot pay their loans back. The student loan mess is ruining the American Dream for countless students and families across the country; they have no way out of it.
Thanks to getting PHEAA to a jury trial, however, the record of evidence in this case can now be examined by the public, including historians, investigative reporters, and those who write law journal articles about civil fraud and the False Claims Act. The fact that the jury was not able to get money back for taxpayers is secondary to the benefit of allowing sunshine onto how our nation's student loan system works, to reveal all its ugliness.
The next phase also must deal with the pending question of who can regulate the student loan lenders and servicers. Several state attorneys general have filed suit on behalf of their citizens against Navient (another large lender and servicer) and PHEAA. The Consumer Financial Protection Bureau has filed suit against Navient as well. The financial institutions are fighting back, as they want desperately to be regulated not by states, but by the Department of Education.
Is there a better way? Many thoughtful people, troubled at the devastation visited on students and their families by the current system (let alone the billions in costs to taxpayers for subsidies to servicers), have suggested that the United States adopt the student loan system used in other countries. Other countries successfully handle student loan repayments through their tax withholding and payment systems, avoiding the Navients and PHEAAs. It's time to take a serious look at this alternative.