CFPB Pullback Shrinks Bankrupt Student Loan Borrowers’ Options

Bankrupt student loan borrowers subjected to illegal debt collection efforts were long able to rely on the Consumer Financial Protection Bureau for help, but the agency’s retrenchment under the Trump administration leaves them with fewer relief options.

The CFPB, under acting Director Russell Vought, moved to stop examining student loan servicers and largely shelved its pursuit of enforcement cases—part of the consumer finance watchdog’s large-scale regulatory retreat in recent months.

The agency also dropped a 2023 lawsuit against the Pennsylvania Higher Education Assistance Agency that alleged the student loan servicer attempted to collect on loans discharged through bankruptcy. The move was an early sign that borrowers are now largely on their own, consumer advocates say.

“The dismissal of the cases is a horrible signal to lenders that there’s no longer a cop on the beat, and that they can get away with this,” said John Rao, a senior attorney with the National Consumer Law Center.

State attorneys general can sue on behalf of borrowers whose student loans were canceled in bankruptcy, but they don’t have the CFPB’s supervisory powers. Private lawsuits are another option for borrowers, but those can take years.

The PHEAA complaint was similar to a 2017 case in the US Bankruptcy Court for the Eastern District of New York, where a judge in May issued a nationwide order blocking private student loan lenders and servicers from collecting on certain debts that were likely discharged in bankruptcy. The ruling is under appeal.

The CFPB and PHEAA didn’t immediately respond to requests for comment.

States’ Role

Losing the only federal agency that policed private student lenders is not only a blow to consumers but also to state-level regulators that benefited from a nationwide infrastructure that coordinated enforcement efforts and shared useful intelligence, said Mike Pierce, the executive director of advocacy group the Student Borrower Protection Center.

“It was designed by Congress to look around corners” and educate borrowers who weren’t aware they were being cheated, he said.

States may now be inclined to target abusive debt collectors using local laws or consumer financial policing powers under the Dodd-Frank Act, according to Pierce.

But state attorneys general must rely on subpoenas and other investigative tools that can take longer to generate information than for CFPB examiners looking directly at company records.

The CFPB stepback could lead to “really messy litigation” with lenders and servicers adopting more obstinate positions than they would with a federal enforcement action, Pierce added.

Sen. Elizabeth Warren (D-Mass.), the CFPB’s architect, said in a statement that the agency is needed “so servicers can’t get away with ignoring court orders and harassing borrowers looking for a fresh start.”

New York and California already have robust private student lender regulations, while more than 20 states monitor student loan servicers, according to Pierce.

Discharged Student Debt

Although student debt is difficult to discharge in bankruptcy, private loans can be tossed if they don’t meet the US Bankruptcy Code’s “qualified education loan” criteria.

Loans that exceed attendance costs, cover nonqualified expenses, or are given to ineligible students or to attend unaccredited schools may not meet the criteria.

Those lenders offer funds for expenses such as cars and rent under the pretense of being student loans, said George Carpinello of Boies Schiller & Flexner LLP. He represents a proposed class suing Firstmark Services LLC, a division of loan servicing giant Nelnet Inc.

The suit’s lead plaintiff, Tashanna B. Golden, has been in bankruptcy court for over seven years, saying certain law school debts were discharged in her Chapter 7 case.

Carpinello said information he shared with the CFPB about illegal post-bankruptcy collection practices prompted the agency to sue PHEAA for collecting discharged debts without notifying the students.

PHEAA challenged the CFPB’s jurisdiction, but the CFPB asserted its authority over fraud cases, particularly regarding the nondisclosure of debt discharges to students.

“The fraud is that you’re collecting on discharged debts, and you aren’t telling students that their debts have been discharged,” Carpinello said. “It was a very viable case, and it was progressing, but then Trump got elected and they dropped the case.”

The agency accused PHEAA of improperly treating all education-related loans as nondischarged through bankruptcy unless the lender or a court explicitly said otherwise.

“The CFPB had PHEAA dead to rights,” Pierce said. “And PHEAA wasn’t alone.”

Charles Kaplan from Perry, Guthery, Haase & Gessford PC, representing Firstmark, acknowledged during a 2023 court hearing in Golden’s case that it services loans as long as a lender says the debt can be collected in bankruptcy.

Firstmark didn’t respond to a request for comment.

Unlike federal student loans, which require borrowers to prove “undue hardship”—often a high bar—consumers shouldn’t have to prove their loans were discharged, Rao said.

A servicer must determine once it’s notified of a bankruptcy whether the loan is dischargeable by reviewing files and making inquiries. If lenders knew students were using funds for nonqualified expenses, Rao said, they should’ve classified those as nonqualified loans.

But due to the misconception that student loans can’t be discharged, servicers may assume all loans are fair game for collection even in bankruptcy.

Even if servicers say they weren’t aware of a debt discharge, they have a contractual obligation to maintain accurate loan information, Rao noted.

“It’s not what you know, but what you should have known,” he said.

Watchdog Missing

The CFPB played a key role in forcing student loan servicer Navient Corp. to change how it handled certain private loan discharges, according to Eileen Connor, president of the Project on Predatory Student Lending.

Lenders such as Navient often include arbitration clauses in their contracts, making it harder for borrowers to seek legal help, she said.

The CFPB’s oversight prompted Navient to allow borrowers to seek relief through its website.

“If it hadn’t been for the CFPB, that really wouldn’t have happened,” Connor said. “And it’s kind of uncertain what the future of this is in light of the status of the CFPB now.”