A Possible Way to Reverse the FFEL 'Betrayal'

October, 2022

Washington —  Although the Biden administration's student loan cancellation plan has, so far, survived several attempts to kill it in court, it has come at a high price.   Hundreds of thousands of FFEL borrowers feel betrayed that they will see no relief because, to counter plaintiffs' claims of standing to sue, the Biden administration abruptly took away FFEL borrowers' eligibility to claim cancellation benefits after consolidating their loans from FFEL into DL.  The FFEL borrowers had been assured that they were eligible right up to the very day the promised benefits were withdrawn.   

This "gut-punch" to FFEL borrowers may have been needless.  Standing has a high bar, as Judge Henry Edward Autrey explained in his decision to dismiss six states' requests for injunctive relief against the cancellations.  Plaintiffs must "show a concrete and particularized injury for the purposes of standing," he wrote, pointing out four times that "speculative" injury did not qualify for standing.  

Make no mistake: any injury to the plaintiffs from FFEL consolidations and cancellations is highly speculative.  Fitch Ratings, the Wall Street company that rates student loan asset-based securities (SLABS), even considers the Biden plan to be "positive" for SLAB owners like the plaintiffs.  Why DOJ did not make this argument for the Biden administration is inexplicable.  It is commonly understood in industry; cancellations will reduce maturity risk.  

During oral argument, at 1:06 onward, Judge Autrey even tossed up a softball question to DOJ, inviting a full swing at how speculative the plaintiff's alleged injuries were, in reality.  DOJ instead touted the argument that it was cutting off borrowers' benefits, needlessly giving credibility to the plaintiff's assertions that cancellations would be bad for SLABS.  In his written decision, unfortunately, Judge Autrey conformed to DOJ's sole argument that removing the borrower benefits settled the question.  

This will make it all that much harder for the Biden administration to make amends with the FFEL borrowers, as it says it wants to do.  

There is a possible way back, to undo the damage.  First, when the case is appealed, DOJ needs to make the case that the standing question is not solely a function of making FFEL borrowers abruptly ineligible.  

Second, there is the matter of statutory parity between FFEL and DL programs.  Parity prevents termination of FFEL benefits if DL borrowers are eligible for them.  

A new case on the parity question, Rosenberg v. Deutsche Bank, has been filed in the Southern District of New York.  It cites 20 U.S.C. 1087e(a)(1)-(2) of the Higher Education Act:

Notwithstanding any other provision of this part, loans made to borrowers under this part that, except as otherwise specified in this part, have the same terms, conditions, and benefits as loans made to borrowers under section 1078 of this title [FFEL Loan Program], shall be known as “Federal Direct Stafford/Ford Loans”.

And argues:

...the United States Court of Appeals has ruled that, by enacting the statutory parity provisions in the HEA requiring that all federal student loans under the FFEL Loan Program and the Direct Loan Program “shall have the same terms, conditions, and benefits”, it is clear that (a) “Congress created a policy of inter program uniformity” between the FFEL Loan Program and the Direct Loan Program and (b) “Congress’s instructions to the DOE on how to implement the student loan statutes carry this unmistakable command: Establish a set of rules that will apply across the board.” See Chae v. SLM Corp., 593 F.3d 936, 944-45 (9th Cir. 2010).  [Case 1:22-cv-07567 Rosenberg v. Deutsche Bank, Southern District of New York] 

This is also the historical position of the Education Department.  It would be good to return to it.

Time is short before an upcoming appeal of Judge Autrey's decision in the Eighth Circuit, but DOJ should also draw a distinction between the amount of cancellations at issue and the cost of cancellations to taxpayers.  There is a huge difference, as explained in a previous blog post.  This is potentially important in determining whether the cancellations cross a "major questions" line.  Judge Autrey suggested that the case brought by the six states might succeed on the merits, if the plaintiffs had standing, but his rationale was based on the assumption that taxpayers would be bearing all of the costs.  That assumption is speculative and unwarranted.   

Weak State AG Arguments for Standing

October, 2022

Washington — Six state attorneys general have asked a federal district court in Missouri for injunctive relief to prevent President Biden's announced student loan cancellations from harming the financial interests of lenders, loan servicers, and investors in their states. They have suggested various injuries in an attempt to demonstrate that they have legal standing to bring their case.

Among the alleged irreparable harms are potentially fewer loans to service, more loan consolidations from commercial- to government-held loans, and decreased income from investments in student loan asset-based securities, or SLABS. The six AGs' argument is that borrowers should be kept in their current debt status to avoid loss of revenue streams to those who hold, service, and invest in that debt.

It is important here to take note that other, more consumer-oriented state attorneys general — and the federal Consumer Financial Protection Bureau — have successfully brought suits against several student loan holders and servicers for the benefit of borrowers, taxpayers, and better program management.  They have been able easily to distinguish between perpetrators and actual victims.  

A question of immediate importance, as the new case goes to court in Missouri, is whether any alleged future harm has been offset by federal assistance that continues to benefit the entities identified by the six plaintiffs. A look at the record shows that past and ongoing federal help has been extraordinarily solicitous to these lender, servicer, and investor interests.

• Loan consolidations. Historically, many loan consolidations were in the reverse direction of the plaintiffs' alleged harm. For several years, private lenders, through the use of direct marketing to borrowers, moved billions of dollars of loans from federal to private ownership, generating federal subsidies for the new owners. Although direct marketing tapered off by the time of the Great Recession, in part because of evidence that industry marketers were improperly accessing the U.S. Department of Education's NSLDS lists of borrowers, many of these consolidation loans still populate current SLAB investments. Federal authorities eventually determined that borrowers were often misled by misinformation from the marketers — misuse of federal logos, for example — but no remediations were ever made to borrowers or taxpayers. If the Biden actions now encourage borrowers to consolidate loans in the other direction, any harm must be weighed against this history, as well as the fact that consolidation and call risk are inherent constants in the securities markets.  Some experts even say that SLABS will be helped by the cancellations.*

• False subsidy claims. Beginning as early as 2002 and continuing for several years, many student loan holders made false subsidy claims by moving new loans in and out of older, more lucrative bond issues. The Education Department (ED), after its Inspector General determined that the practice was illegal, ceased paying the false claims but only prospectively, allowing claimants to keep years of illegal proceeds, estimated at the time to total $600-$800 million. Among the loan holders keeping proceeds were those in Iowa, Missouri, and Arkansas, states that now claim harm from future loan cancellations.

Iowa. When the Iowa Student Loan Liquidity Corporation (ISLLC) was independently audited by Kearney & Co., it was found to have been making claims on loan principal of $412 million rather than the legally eligible $78 million. This was not a surprise because ISLLC had been identified several years earlier by ED's regional reviewers for making false claims. Those findings were overruled by ED political appointees, however, and remained out of public sight until discovered much later in litigation.

Missouri. When the Missouri Higher Education Loan Authority (MOHELA) was audited by Kearney & Co., it was found to have been making claims on $226 million principal rather than the legally eligible $43 million. In agreeing with the audit findings, the MOHELA CEO wrote to the auditor: "MOHELA will work diligently to assure corrective measures are taken regarding this issue. Below is a statement from AES/PHEAA..," (another servicer which he went on to blame for causing the false claims). Although professing innocence and corrective action, MOHELA did not return any of the illegal proceeds because ED, incredulously, did not require it.** When PHEAA's many servicing troubles finally caught up with it in 2021 and its federal servicing contracts ended, MOHELA became the new servicer for many of PHEAA's loans, gaining major new contracts from ED. This greatly expands MOHELA's servicing revenues at the same time the Missouri attorney general alleges harm to MOHELA in the new lawsuit.

Arkansas. The Arkansas Student Loan Authority (ASLA) asked not to be audited by an independent auditor for its false claims, on the condition that it would end all future claims for the more lucrative subsidy. ASLA returned approximately $6 million in false claims to the U.S. Treasury, out of an estimated $12 million at issue.

• ECASLA. During the Great Recession, student loan securities markets collapsed despite federal guaranties backing the loans. In order to provide liquidity for borrowers in the bank-based FFEL system, Congress in 2008 authorized the Secretary of Education to provide assistance to the industry. ED offered several different financing opportunities, which resulted in over $100 billion of FFEL loan volume to save the industry. 

• Pre-emption. In 2018, after a federal appeals court ruled that state student loan authorities were not protected by sovereign immunity, opening the door to lawsuits from borrowers and state attorneys general who sought to protect their borrowers under state consumer protection laws, the Secretary of Education determined that the federal Higher Education Act pre-empted such litigation. Until this determination was subsequently overturned by multiple courts, many loan servicers were protected from the consequences of failing to give borrowers the benefits to which they were legally entitled.

The six AGs' assertions of irreparable harm are dwarfed in comparison to the historical and ongoing largesse showered on student loan entities. A stronger case could be made that squandered federal resources should be clawed back and more borrower debt should be cancelled to compensate for documented predations committed by lenders and servicers. The idea of a few state AGs keeping borrowers in debt as long as possible, to sustain revenue streams for ethically-challenged appendages of a superannuated industry, is repugnant. 

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* Fitch Ratings, contrary to the six AGs' claim of irreparable harm, suggests that loan cancellations will actually have a positive effect on SLABS:

"As Fitch has previously communicated, student loan forgiveness that includes FFELP loans would have a positive effect on some FFELP ABS trusts exposed to maturity risk, as student loan forgiveness of any amount would generate a one-time prepayment that could reduce maturity risk for the most vulnerable trusts. High levels of cash flow would, in most cases, pay down the senior-most bonds with the closest maturity dates. Maturity risk has been the main driver behind ratings downgrades in the sector, given the underlying loans have at least a 97% federal guarantee against default of principal and accrued interest."

** MOHELA, according to the Missouri state auditor, went on a lavish spending spree instead of returning the false claims.  See https://auditor.mo.gov/press/2007-56.htm.