In a lawsuit filed May 31, a federal consumer watchdog is alleging that the Harrisburg-based Pennsylvania Higher Education Assistance Agency misled student borrowers into thinking they still owed money after their student loans were discharged through bankruptcy.
The crux of the lawsuit is a distinction between two types of student loans — those that can be erased through bankruptcy without any extra effort from the borrower, and loans that require additional steps to be discharged.
The lawsuit by the Consumer Finance Protection Bureau alleges PHEAA violated federal law by failing to distinguish between the two types, leading the loan servicer to treat all borrowers who filed bankruptcy as if their loans were still due.
PHEAA, which services a loan portfolio of about $17.8 billion, suspends collection efforts during a borrower’s bankruptcy case, according to the lawsuit.
But once the case ends, those borrowers receive notices indicating what they still owe and when — unless PHEAA is notified that the borrower took the extra steps, if necessary, to discharge their student loan.
In its lawsuit, the CFPB claims PHEAA, which does business as American Education Services, collected or tried to collect on at least 177 loans that were automatically discharged in bankruptcy between 2017 and 2021.
The CFPB further claims that PHEAA collected “thousands or tens of thousands of dollars” from those borrowers.
The lawsuit, which seeks unspecified financial damages, also faults PHEAA for sending allegedly inaccurate information about those borrowers to credit reporting agencies.
The pushback: In a statement, PHEAA spokesperson Bethany Coleman said the agency disagreed with “any assertion that PHEAA’s handling of bankruptcy matters has been inconsistent with the Bankruptcy Code or the orders of Bankruptcy Courts.
“The Bankruptcy code does not fall within the federal laws listed by Congress over which the CFPB has oversight, and this is another example of regulatory overreach by the CFPB,” she added. “This issue comes down to a matter of interpreting bankruptcy law. The accusation that PHEAA knowingly acted in a way that was contrary to the law is absolutely inaccurate and PHEAA will defend itself vigorously through the legal process.”
