By Austin Smith | October 18, 2022
As we discussed back at the start of the pandemic, the student loan relief accorded through the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent administrative action left behind millions of federal student loan borrowers. While most borrowers enjoyed a payment pause, safety from the federal government’s debt collection machinery, and other key protections, borrowers who just happened to owe on the wrong kinds of federal loans were unfairly denied badly-needed help during COVID-19.
Now, a new lawsuit may finally get those millions of borrowers relief. This lawsuit argues not just that these borrowers were entitled to the same aid as everyone else all along, but that this right stems from laws that the profiteers who own these loans demanded decades ago. Back then, lenders demanded that the government give borrowers who took on federal student loans through banks the same rights as borrowers who took on loans directly from the government. In doing so, these companies thought they would be protecting their bottom line by preventing the government from gaining a competitive edge. But now, those laws may have outright required lenders to afford borrowers the same COVID-19 related benefits as everyone else.
Student loan companies made their bed. It’s time for them to lay in it, and for millions of borrowers to finally get the relief they deserve.
Read the complaint in the lawsuit here: https://protectborrowers.org/wp-content/uploads/2022/10/Rosenberg-v-Deutsche-Bank-SLT-ELC-Trust-et-al-Complaint.pdf
Background: The Decades-Long Student Loan Boondoggle that Continues to Haunt Millions of Borrowers
To understand who these borrowers are and how they may finally be able to get the help they’re entitled to, you’ll need a little background. There was originally one major student loan program: the Federal Family Education Loan Program (FFELP). FFELP was a public-private partnership between the federal government and commercial lenders under which creditors lent their own money to students, but the loans were guaranteed or insured by the federal government.
Owing to inefficiencies, higher costs, and (brazen) corruption in FFELP, Congress created the Direct Loan Program in 1992, under which private lenders were shut out of the process and the federal government lent students money directly from the US Treasury.
But Congress did not eliminate FFELP when it created the Direct Loan program—instead, for the next 20 years, the Direct Program and FFELP coexisted. And these two programs did not coexist peacefully. FFELP lenders—who had tried to strangle the Direct Loan Program in its crib—were convinced that the federal government was going to try to phase out FFELP and derail their gravy train by offering lower interest rates or better terms under the Direct Program.[1] To combat this, FFELP lenders an army of lobbyists to persuade Congress to pass a law that would ensure that all borrowers—whether under the FFEL Program or Direct Program—got the same terms, conditions and benefits.
Fast forward to the Great Recession. In 2008, FFELP lenders, like all other creditors, warned about a lack of “liquidity” (bankers’ word for “being broke”) in the FFELP markets and asked the government to inject some federal dollars to ensure they could continue to make loans to students. Congress acquiesced with the Ensuring Continued Access to Student Loans Act (ECASLA). Under ESCALA, Congress authorized the Department of Education (ED) to purchase hundreds of billions of dollars of outstanding FFELP loans from lenders, on the condition that they use the proceeds to make more FFELP loans.
In this way a new category of federal student loans was created: a sort of gray area between the Direct Loan Program and the FFEL Program. That meant there were now three types of federal student loans, including:[2]
- Direct Loans, which are all made and owned by the federal government;
- FFELP loans made by commercial lenders but now owned by the government (ED-held FFELP loans);
- FFELP loans made by commercial lenders and still owned by private creditors (Commercial FFELP Loans).
Over time, Commercial FFELP loans became something of a forgotten step-child and were increasingly treated more like purely private student loans (which, because of their government guarantee, they are not). In 2020, when the Trump administration first ordered relief to borrowers during the start of the pandemic, the only two categories of borrowers the government concerned themselves with were groups 1 and 2 enumerated above, Direct and ED-held FFELP loans. The CARES Act absorbed this distinction, as did all subsequent relief continuing to today, leaving Commercial FFELP borrowers up the creek without a paddle.
At Long Last, a Victory for Commercial FFELP Borrowers
But there’s a problem. Those of you who have read this entire post (and congratulations on that) will say, “but wait! I thought all federal borrowers regardless of which group they happen to fall into are legally entitled to the same terms, conditions and benefits!”
And some of you might also say, “And it’s a problem deliciously of the lenders’ own making because it was the FFELP Lenders who insisted on a law that ensured all borrowers got the same terms, conditions and benefits to prevent the federal government from driving them out of business after 1992 with better terms and rates under the Direct Program!” To which we say, yes, you are correct.
Contrary to recent actions of Congress and the Trump and Biden administrations, Commercial FFELP borrowers are legally entitled to the same terms, conditions and benefits as their peers in Group #1 and Group #2—including access to the interest-free payment pause with credit toward loan forgiveness under income-based repayment and the Public Service Loan Forgiveness program that other borrowers have enjoyed during COVID-19. But instead, commercial lenders have been allowed to continue collecting tens of billions of dollars on their own FFEL Loans while the federal government generously halted all collections and interest accrual during the pandemic.
Some of you might now be saying, “somebody should do something about that.” And now they have. A new lawsuit has been filed to protect these millions of people from the unequal treatment they’ve had to endure. It’s called Rosenberg et. al. v. Deutsche Bank SLC ELT Trust et. al., in the Southern District of New York.
This lawsuit simply points out that if Commercial FFELP loans are supposed to offer borrowers the same benefits as other loans under the law—precisely as FFELP lenders demanded—that means borrowers are entitled to the same COVID-19 era protections as other borrowers.
Victory in this case could mean an end to the insane, arbitrary line-drawing that has imposed massive hardship on millions during a generational pandemic.
And after all, isn’t parity what FFELP lenders wanted?
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Austin Smith is a litigator at Smith Law Group, LLP, who focuses on discharging student loans in bankruptcy. Mr. Smith’s article, The Misinterpretation of 11 USC 523(a)(8), was foundational in articulating the proper scope and application of the student loan non-dischargeability provision of the Bankruptcy Code, and its arguments and reasoning have been adopted by bankruptcy courts all across the country. Mr. Smith’s work on behalf of debtors has been profiled by the Wall Street Journal, NPR, ABC News, Fox News, People Magazine, GOOD Magazine, the National Law Journal, Law 360, the American Bankruptcy Institute, and more.
[1] In fact, in one piece of testimony, FFEL Lenders referred to the federal government as a “predator” that threatened the economic future of FFEL Lenders. See https://perma.cc/VLL6-BKLT.
[2] This broadly ignores Perkins loans, which are only a tiny fraction of overall federal student loan debt.