CFPB Hits Student Loan Servicer Over Bankruptcy-Discharged Loans

A major student loan servicer is facing an enforcement action from the Consumer Financial Protection Bureau alleging it falsely reported students’ debt to consumer credit reporting companies and attempted to collect on loans wiped out through bankruptcy.

The CFPB filed a suit Friday in the US District Court for the Middle District of Pennsylvania seeking a permanent injunction against the Pennsylvania Higher Education Assistance Agency, which does business as American Education Services, marking the federal consumer finance watchdog’s second action against the servicer this month.

The CFPB is also seeking refunds for borrowers and civil money penalties under federal consumer protection laws.

“PHEAA has ignored its responsibilities and illegally pursued borrowers for loans they no longer owe,” CFPB Director Rohit Chopra said Friday.

The servicer didn’t immediately respond to a request for comment.

Most federal and private student loans aren’t discharged unless a bankruptcy court determines they would cause “undue hardship on the consumer,” the bureau said. In some cases, however, private student loans don’t have to meet the undue-hardship requirement and are discharged through a standard bankruptcy order, prohibiting creditors from going after the loans. Those “non-qualified” loans include money borrowed to pay for tuition at schools that are ineligible for federal student aid and for medical residency, the CFPB said.

The CFPB in March 2023 issued a warning to servicers instructing them to halt any illegal attempts to collect on loans discharged through bankruptcy, emphasizing borrowers were no longer legally obligated to repay.

The PHEAA “lacks policies and procedures to identify which private loans it services have been discharged” by a bankruptcy court order, the bureau said Friday. The servicer from 2017 to 2021 collected or attempted to collect on nearly 8,000 private student loans after a bankruptcy proceeding, including at least 177 that were “non-qualified” loans, according to the complaint.

In a separate matter, the PHEAA and the National Collegiate Student Loan Trusts, a student loan investment trust, agreed to pay more than $5 million in early May to resolve the CFPB’s claims that they didn’t properly handle borrowers’ requests for payment relief, including forbearance under pandemic aid programs.

The case is CFPB v. Pa. Higher Educ. Assistance Agency, M.D. Pa., No. 24-cv-00896, complaint 5/31/24.