One of the many lawsuits dogging student loan giant Navient will move forward after a judge shot down the company’s request to have the suit dismissed.
In the 70-page opinion released earlier this week as part of a lawsuit filed by Pennsylvania Attorney General Josh Shapiro, U.S. district court judge Robert Mariani called Navient’s arguments to dismiss the case at times “legally deficient,” “mistaken” and “creative,” but ultimately unconvincing.
What’s more, the court noted it wasn’t persuaded by a memo written earlier this year by Secretary of Education Betsy DeVos meant to shield student loan companies from state laws.
The opinion comes as Navient is facing a handful of similar lawsuits from other states, including California and Illinois as well as the Consumer Financial Protection Bureau.
Navient could face more legal battles
It could bolster other, similar litigation against student loan companies. Though the judge’s rebuke was simply a procedural step allowing the case to move forward and isn’t binding on other courts, the thoroughness of the opinion makes it more likely that other judges looking at similar issues will find it persuasive, said Dalié Jiménez, a professor at the University of California-Irvine’s law school.
“This was a devastating opinion to Navient’s case,” Jiménez said, adding that “it could be quite influential.”
Navient declined to comment on the opinion.
The company has previously said that the allegations in the lawsuit and other similar claims are false. Shapiro said in a statement that the court’s decision, “brings us one step closer in our fight to provide justice to the students and families in Pennsylvania.”
In his suit, Shapiro alleges Navient violated Pennsylvania state law by steering borrowers towards costly repayment programs. He also alleges that Navient’s corporate predecessor, Sallie Mae, deceptively offered risky, subprime loans to borrowers as a way to gain access to more lucrative federal student-loan volume.
The opinion marks the latest development in a years-long battle between the federal government, states and student-loan companies over whether and how states can regulate the firms, which are also contractors of the Department of Education. Though rising college costs and stagnant wages have certainly fueled the nation’s $1.5 trillion student-loan problem, advocates have argued that student-loan companies exacerbated the issue by making it more difficult than necessary for borrowers to pay off their loans.
State lawmakers and law enforcement officials have tried to crack down on this behavior by holding student-loan companies accountable to state laws.
Servicers say they’re immune to state laws
But Navient and other student-loan servicers have relied on the concept of preemption — the idea that federal law supersedes state law in cases where they’re in conflict — to argue that they’re not subject to these consumer protection regulations. DeVos’s memo, which she published in March, aimed to bolster that argument.
With his opinion earlier this week, Mariani weighed in on this battle, saying he found both the DeVos memo and Navient’s arguments against allowing a suit filed by a state’s top law enforcement official to proceed unconvincing. In parts, the opinion echoed a ruling from earlier this year in a similar suit filed by the state of Illinois.
But in other cases, judges have taken a different approach; a U.S. district court judge for the Northern District of Florida granted a different servicer’s motion to dismiss a case resting on similar arguments. That decision is now being appealed.
The divide among lower courts means that the debate over whether student loan companies are subject to state law will continue, said David Rubenstein, a professor at Washburn University School of Law.
With lower courts divided, the issue will continue to wind through the legal system
Courts are reaching different results because the preemption question turns on a judicial assessment of what the enacting Congress intended when it passed the statutory language at issue, but that language is ambiguous in key respects, Rubenstein said.
“The split in the lower portends a likely split in the appellate courts as well, which can be a factor that the Supreme Court can take into account when deciding whether to hear this controversy,” he said.
In the Pennsylvania case, Shapiro accused Navient of violating state law by, among other things, steering struggling borrowers into forbearance — which pauses payments, but where interest still accrues — over other, less costly repayment plans. Shapiro also contends Navient failed to adequately notify borrowers that they needed to take steps to recertify yearly in lower-cost repayment plans.
In asking the court to dismiss the state’s case, Navient’s attorneys argued that the state’s student-loan servicing allegations are preempted by the Higher Education Act — the statute that governs higher education and financial aid — HEA, both because the law governs disclosures made by student-loan companies to borrowers and because it establishes uniform standards among federal student-loan programs. The court said Navient’s interpretation of HEA “goes too far,” arguing that the disclosure provision of HEA, “does not apply to the sort of claims alleged by the Commonwealth,” which include, “allegations of unfair and deceptive conduct.”
The court also rejected other arguments by Navient, including that another federal statute, the Truth In Lending Act, preempts the state’s subprime loan claims, that the state can’t bring a “copycat” version of the CFPB’s lawsuit and that the company shouldn’t be held legally accountable for statements it made to borrowers indicating that it would work with them to help them make the right decision about their student loans.
“It just point by point defeats every single one of [Navient’s] arguments,” Jiménez said of the opinion. If the state, “is able to prove the facts, it’s very devastating.”
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