PHEAA Lawsuit Continues After Roadblock

By Ryan McFadden
News Editor

Massachusetts continues its legal battle with Pennsylvania Higher Education Assistance Agency or PHEAA, after a roadblock in Suffolk Superior Court three weeks ago.

Massachusetts Attorney General Maura Healey sued PHEAA last August for allegedly swindling student loan borrowers out of time and money and undermining two federal student loan forgiveness programs.

“PHEAA’s shoddy student loan servicing has caused significant financial harm to thousands of Massachusetts students.

We sued to hold the company accountable for cheating students and families under Massachusetts law, and to protect the financial futures of teachers and public servants across the country,” Healey said in a statement.

Officials from the US Department of Justice (DOJ) wrote that PHEAA’s work for the federal government is “already heavily regulated by federal statute” and bound by contract to the US Department of Education. Therefore, to the extent that Healey’s claims conflict with the requirements of federal law, her allegations are preempted.

The requirement of federal law is that PHEAA must continue following regulations described by federal statute and a contract with the Department of Education, according to court documents.

“We carry out our duties according to the rules of the program,” a PHEAA spokesperson said over the phone. “It’s their program we work for them.”

The DOJ argued it is a “physical impossibility” for PHEAA to follow said “rules of the program” and provide the relief Healey seeks for her Commonwealth.

“Where state law is incompatible with federal law, therefore, state law must yield.” The DOJ’s statement of interest read, using the Supremacy Clause as evidence.

The Justice Department also argues the plaintiff has “alternative paths to relief.” In this case, the Department of Education may file a lawsuit against PHEAA if “stronger medicine” is required.

Healey’s response is that “the Department (of Education) has no authority to enforce the laws at issue in this case,” because her lawsuit is not disputing federal regulations applied to PHEAA, it disputes the federal service that allegedly broke Massachusetts law.

“The Department has misunderstood the nature of our complaint,” Healey’s office wrote as background information over email.

“This action does not change the ability of our office to proceed with the case. Our claims do not conflict with any provision of the Higher Education Act or the Department of Education’s regulations.”

Healey seeks restitution for Massachusetts’ student borrowers and “a permanent injunction preventing PHEAA from: denying borrowers the opportunity to make qualifying payments for PSLF and IDR forgiveness purposes; preventing teachers from retaining TEACH Grants; and retaining overcharges and applying overcharges to interest and fees rather than to principle balances, unless directed to do so by borrowers,” according to court documents.

PHEAA has allegedly undermined the Public Service Loan Forgiveness and Teacher Education Assistance for College and Higher Education programs with unfair and deceptive service.

Congress created the programs in 2007, incentivizing college graduates to choose public service careers or become teachers, regardless of how those jobs would hurt their ability to pay off student loan debt.

The Public Service Loan Forgiveness program can be used with any of the IDR repayment plans. It requires 120 qualifying monthly payments under a qualifying employer to receive full student loan forgiveness.

The Teacher Education Assistance for College and Higher Education program offers $4,000 per year for a student in college to become a teacher in a high-need field.

To fulfill the grant money the newly graduated teacher must work full-time for four years in a low-income school. If the teacher does not follow through with the program the grants will be converted back into loans.

In 2012, PHEAA was awarded an exclusive contract to manage these programs and is one of the few student loan servicers approved by the Department of Education to manage the loan assets of the federal government.

PHEAA operates as FedLoan Servicing to manage federally owned loans and handles over a quarter of the nation’s $1.4 trillion student loan debt. FedLoan Servicing brings home the bacon compared to PHEAA’s mandated work funding student loans and grants for Pennsylvania residents.

Now, the federal student loan servicer has allegedly deprived borrowers of Qualifying Loan Forgiveness months, converted TEACH grants back into loans with interest and overcharged hundreds of Massachusetts borrowers.

These claims stem from alleged servicing delays, an untimely processing of applications and a failure to properly count the money and refund overcharged payments.

The federal student loan servicer has been accused of knowing the existence of the errors while failing to rectify them for the sake of a better corporate profit.

PHEAA denied the allegations and the DOJ has stepped in to protect federal interests and represent the Department of Education in this case.

“We cannot comment on pending litigation,” the Department of Education wrote over email.

The legal dispute goes on but questions remain.

Can states hold federal business accountable to state laws without stepping over federal regulations?

Will federal regulations hold states accountable to overreaching to protect federal business?

What will happen to the allegedly damaged students?

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