Demanding Justice in the Bluegrass State

By Seth Frotman and Ben Carter | January 2, 2019

Today, the Student Borrower Protection Center partnered with the Kentucky Equal Justice Center (KEJC) to support Attorney General Beshear’s fight to protect student loan borrowers.

In 2018, Attorney General Beshear began investigating the servicing of student loans owned by the National Collegiate Student Loan Trusts (NCSLT). These Trusts are notorious for shoddy record-keeping, meaning that servicers and collectors pursue borrowers for debt that they can’t prove are owed. In fact, an internal audit of NCSLT loans found that “a random sample of nearly 400 National Collegiate loans found not a single one had assignment paperwork documenting the chain of ownership.” Attorneys general across the country have started similar investigations as they work to protect the borrowers victimized by “the worst-performing student loan investment vehicles ever created by Wall Street.”

And the company responsible for servicing these student loans—sending out all of the bills, receiving payments, computing interest, and applying people’s payments—is the Pennsylvania Higher Education Assistance Agency (PHEAA), also known as American Education Services. PHEAA is one of the largest student loan servicers in the country and handles over $425 billion in student loan debt owed by millions of consumers nationwide. In fact, one out of every ten dollars of non-mortgage consumer debt in the country is handled by PHEAA. And yet, in Kentucky and around the country, PHEAA is arguing that it is above the law.

PHEAA is asking the Kentucky Court of Appeals to decide whether Attorney General Beshear, Kentucky’s top law enforcement official, has the authority to take action against a company that it suspects is engaged in rampant illegal practices. You might be thinking, “Of course an enormous consumer financial services corporation should have to follow the law!” But PHEAA has been arguing in courts across the country that it does not.

This may seem confusing and, to be sure, these legal gymnastics have judges and observers scratching their heads. More than a half-century ago, the Commonwealth of Pennsylvania agreed to back PHEAA, lending its name to a new corporation created to provide grants and loans to Pennsylvania college students. Yet today, in courtrooms across the country, PHEAA’s lawyers try to sell judges on the notion that Pennsylvania created something all together different. Now running a multi-billion dollar nationwide financial services business in partnership with the nation’s biggest banks, PHEAA argues that its historical backing from the Commonwealth of Pennsylvania should shield it from liability when it cheats its customers, in violation of laws enacted by other states or the federal government.

We believe that a company that holds itself out to be a “national provider of student financial aid services, serving millions of students and thousands of schools” (emphasis added) should be held accountable just the same as any other loan servicer for the widespread problems occurring under its watch.

Fortunately for borrowers across the country, courts agree. For example, last year, PHEAA tried to stymie Washington Attorney General Bob Ferguson’s efforts to investigate PHEAA’s handling of NCSLT loans—the same loans at issue in Kentucky. PHEAA failed.

It only makes sense that Attorney General Beshear should be able to protect Kentuckians by holding unscrupulous student loan companies to account, including PHEAA.

This case will also determine whether the Commonwealth of Kentucky could take action to address the widespread failures in the Public Service Loan Forgiveness program. This program promises student borrowers who decide to devote their careers to serving their communities that the remaining balance of their student loans will be forgiven after 10 years of public service.

PHEAA is the sole servicer tasked by the U.S. Department of Education with managing this program. As a result, PHEAA’s practices will determine the financial futures of millions of our nation’s public servants. With servicing breakdowns being reported daily, and the first data demonstrating 99% denial rates for borrowers seeking Public Service Loan Forgiveness, it is no wonder why PHEAA is trying to argue that it is above the law.

That’s why we are proud to support Attorney General Beshear’s efforts to demand justice for Kentucky borrowers. If a Kentucky court decides that PHEAA is above the law, it will slam the courthouse doors shut on borrowers across the Bluegrass State. Borrowers deserve better.  

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Seth Frotman is the Executive Director of the Student Borrower Protection Center. He previously served as Assistant Director and Student Loan Ombudsman at the Consumer Financial Protection Bureau, where he led a government-wide effort to crack down on abuses by the student loan industry and protect borrowers.

Ben Carter is Senior Litigation and Advocacy Counsel at Kentucky Equal Justice Center. KEJC is a non-profit poverty law advocacy center. The mission of KEJC is to promote equal justice for all residents of the Commonwealth by serving as an advocate for low income and other vulnerable members of society.