August, 2023
Washington — A few years ago, a Philadelphia newspaper reporter called me to validate, if possible, what he thought was an outrageous statement from a board member of the federal student loan servicer PHEAA. The board member had told him that PHEAA did not cancel federal student loans even if borrowers qualified by law, because holding onto the loans was how PHEAA made money, not by canceling them.
I told him it was all too true and he had an obligation to report it publicly for the sake of the integrity of the federal student loan program. Not to mention how PHEAA was adding to ever-higher debts for many who will never be able to pay them off.
The call came around the same time a PHEAA employee asked me for advice on how to fight his dismissal for objecting to how PHEAA was misleading borrowers through its call-center operations.
It was not long until the attorneys general of Massachusetts and New York both sued PHEAA on behalf of their states' borrowers.
The U.S. Department of Education, however, took the side of PHEAA. In a March, 2018, notice from Secretary Betsy DeVos, the Department claimed that neither states nor borrowers could bring actions against PHEAA because of "federal preemption" under the Higher Education Act. (Talk about federal overreach!) The Department also ended its cooperation with another federal agency, the Consumer Financial Protection Bureau, with regard to student loan borrower complaints. The Department of Justice even attempted to intervene against the Massachusetts lawsuit.
These actions were led and coordinated by former PHEAA employees who rotated through the Department of Education.
Fast forward to 2023. Several state and federal judges have knocked down the "preemption" attempt to bilk borrowers and the Department of Education has, appropriately, begun to make remediations to those victimized.
In the Federal Register of July 24, 2023, Secretary Miguel Cardona finally reversed the bizarre attempt to protect servicers from borrowers, and from states acting on behalf of borrowers. He announced the return to "cooperative federalism," the foundation of the Higher Education Act of 1965. This follows his action earlier in the month to cancel $39 billion of student debt that was the result of improper servicer actions.
An experienced attorney with considerable federal experience is now asking, in part on behalf of family members who have been borrower victims, if PHEAA's willful behavior is an example of illegal conduct under the Racketeer Influenced and Corrupt Organizations act (RICO). It certainly seems to be. If this isn't racketeering, it's hard to imagine what would be.
PHEAA is no longer a federal loan servicer; much of its portfolio has been transferred to MOHELA, a servicer with its own set of credibility problems. But that does not mean a RICO lawsuit against PHEAA could not be brought.
Moreover, at what point should colleges have been obligated to warn potential borrowers of the risks involved in taking out student loans, that servicers could and would undermine the terms and conditions of the loans, and that consumer protections would be erased in the process? Would the FTC and SEC permit the marketing of such products in other sectors of the economy? Surely not.
I regret that I was never able to help the PHEAA employee who was fired.
To my knowledge, the Philadelphia newspaper reporter never made public what the PHEAA board member told him. Had he done so, perhaps that $39 billion — and counting — figure would have been much lower.
