Student Loan Servicing Class Actions: Fighting Predatory Practices

Introduction

Student loan debt in the United States has reached a staggering $1.75 trillion, affecting approximately 45 million borrowers. As this debt crisis has grown, so have concerns about the practices of the companies hired to service these loans. Student loan servicers—the companies that manage loan accounts, process payments, and implement forgiveness programs—have increasingly faced class action lawsuits alleging widespread mismanagement and deceptive practices.

These class actions represent a significant avenue for borrowers seeking redress for servicer misconduct that has potentially cost them thousands of dollars in additional interest, delayed or denied loan forgiveness, and caused substantial financial hardship. This article examines the most significant student loan servicing class actions, common allegations against servicers, major settlements, and how borrowers can participate in these lawsuits.

Common Allegations Against Loan Servicers

Class actions against student loan servicers typically include several common allegations:

• Providing inaccurate information: Misleading borrowers about repayment options, eligibility requirements for forgiveness programs, or the status of their applications.
• Misapplying payments: Failing to properly allocate payments across multiple loans or applying payments differently than instructed by borrowers.
• Processing delays: Excessive delays in processing applications for income-driven repayment plans or loan forgiveness programs.
• Improper forbearance steering: Pushing borrowers into forbearance (temporarily pausing payments) instead of more beneficial income-driven repayment plans.
• Misreporting to credit bureaus: Incorrectly reporting loan status to credit bureaus, damaging borrowers' credit scores.
• Administrative errors: Miscounting qualifying payments for loan forgiveness programs or losing submitted documentation.
• Failing to honor forgiveness programs: Not properly implementing loan forgiveness programs as mandated by federal regulations.

These allegations form the basis for claims under various legal theories, including breach of contract, negligence, unfair and deceptive trade practices, and violations of consumer protection laws.

Public Service Loan Forgiveness Lawsuits

The Public Service Loan Forgiveness (PSLF) program, established in 2007, promises loan forgiveness for borrowers who work in qualifying public service jobs and make 120 qualifying monthly payments. However, when the first borrowers became eligible for forgiveness in 2017, over 98% of applications were rejected, leading to numerous lawsuits.

Key PSLF-related class actions include:

• Weingarten v. DeVos (2019): The American Federation of Teachers sued the Department of Education and loan servicer FedLoan Servicing (PHEAA) over mismanagement of the PSLF program. The lawsuit alleged widespread errors in counting qualifying payments and providing misleading information to borrowers.
• Lawson-Ross v. Great Lakes (2020): This case challenged Great Lakes Educational Loan Services' alleged misrepresentations about borrowers' eligibility for PSLF. The Eleventh Circuit ruled that federal law did not preempt state law claims regarding affirmative misrepresentations by loan servicers.
• Hyland v. Navient (2018): A group of public service workers alleged that Navient systematically misdirected borrowers away from PSLF by providing false information and failing to properly process payments. The case resulted in a settlement that required Navient to improve its practices regarding PSLF guidance.

These lawsuits have driven policy changes, including the PSLF Limited Waiver and PSLF Account Adjustment, which have allowed many previously rejected borrowers to receive forgiveness by temporarily relaxing program requirements.

Income-Driven Repayment Plan Mismanagement

Income-driven repayment (IDR) plans adjust borrowers' monthly payments based on their income and family size, with any remaining balance forgiven after 20-25 years of qualifying payments. Class actions have alleged widespread mismanagement of these plans:

• Crosby v. U.S. Department of Education (2022): This lawsuit challenged the Department of Education's failure to properly implement IDR forgiveness. Despite IDR plans existing since the 1990s, virtually no borrowers had received the promised forgiveness after 20-25 years. The plaintiffs alleged that servicers failed to keep adequate records of qualifying payments and miscounted borrowers' progress toward forgiveness.
• Sweet v. Cardona (formerly Sweet v. DeVos): While primarily focused on borrower defense claims, this case also addressed how servicers handled IDR applications for borrowers who attended fraudulent institutions.
• IDR Payment Counting Errors: Multiple class actions have alleged that servicers improperly counted IDR payments, particularly during transfers between servicers, resulting in borrowers making more payments than required.

In response to litigation pressure, the Department of Education announced an IDR Account Adjustment in 2022 to correct payment counting errors and credit borrowers for periods that should have counted toward IDR forgiveness but were not properly tracked.

Navient Class Actions and Settlements

Navient, one of the largest student loan servicers (formerly part of Sallie Mae), has faced numerous class actions and government lawsuits alleging widespread misconduct:

• CFPB v. Navient (2017): The Consumer Financial Protection Bureau sued Navient for allegedly "failing borrowers at every stage of repayment." The lawsuit claimed Navient steered struggling borrowers into forbearance instead of income-driven repayment plans, incorrectly applied payments, and failed to act when borrowers complained.
• Multi-State Attorney General Settlement (2022): Navient agreed to a $1.85 billion settlement with 39 state attorneys general to resolve allegations of widespread unfair, deceptive, and abusive student loan servicing practices. The settlement provided $1.7 billion in debt cancellation for certain private loans and $95 million in restitution to federal loan borrowers who were improperly steered into forbearance.
• Demyanenko-Todd v. Navient (2017): This class action alleged that Navient misapplied payments when borrowers paid more than the minimum due, resulting in inappropriate allocation of payments across multiple loans.
• Travis v. Navient (2017): This case challenged Navient's practices regarding PSLF, alleging that the company misled borrowers about their eligibility for the program.

Navient exited the federal student loan servicing business in 2021, transferring its accounts to other servicers. However, litigation over its past practices continues.

Improper Forbearance Steering Cases

"Forbearance steering" is a practice where loan servicers push borrowers into temporary payment pauses (forbearance) instead of potentially more beneficial income-driven repayment plans. During forbearance, interest continues to accrue and capitalize, potentially adding thousands of dollars to loan balances. Several class actions have focused specifically on this issue:

• Daniel v. Navient (2020): This case alleged that Navient systematically steered borrowers into forbearance because it was quicker and easier for customer service representatives than helping borrowers enroll in income-driven repayment plans.
• PHEAA Forbearance Class Action (2019): Borrowers alleged that the Pennsylvania Higher Education Assistance Agency (PHEAA, which operates as FedLoan Servicing) improperly placed borrowers in forbearance while processing income-driven repayment applications, even when those applications should have been processed within the regulatory timeframe.
• Multi-servicer "Monthly Payment Quota" Litigation: Several class actions have alleged that servicers imposed quotas on customer service representatives, incentivizing them to push forbearance (a quick 5-minute call) over income-driven repayment enrollment (which could take 30+ minutes).

Many of these cases have led to settlements that included both monetary compensation and requirements for servicers to improve their practices and provide better information to borrowers about their repayment options.

Borrower Defense to Repayment Delays

Borrower Defense to Repayment is a federal program that allows student loan forgiveness for borrowers whose schools misled them or engaged in misconduct. Processing of these claims has been plagued by delays and policy changes, leading to significant litigation:

• Sweet v. Cardona (formerly Sweet v. DeVos): This major class action challenged the Department of Education's delay in processing borrower defense claims, with some borrowers waiting years for decisions. In 2022, the case was settled for $6 billion, providing automatic loan forgiveness to approximately 200,000 borrowers who attended certain for-profit colleges.
• Bauer v. DeVos (2017): This case challenged the Department of Education's delay in implementing the 2016 borrower defense regulations, which would have made it easier for misled students to receive loan forgiveness.
• Calvillo Manriquez v. DeVos (2019): This class action challenged the Department of Education's decision to partially deny relief to defrauded Corinthian Colleges students based on a formula comparing graduates' earnings to those from similar programs.

While these cases primarily target the Department of Education rather than loan servicers, they have highlighted how servicers' implementation of Department policies regarding borrower defense claims has affected borrowers.

Significant Student Loan Settlements

Several notable settlements have resulted from student loan servicing class actions:

• Navient Multi-State Settlement (2022): $1.85 billion settlement including $1.7 billion in private loan cancellation and $95 million in restitution payments to borrowers affected by forbearance steering.
• Sweet v. Cardona (2022): $6 billion settlement providing automatic loan forgiveness to approximately 200,000 borrowers who attended certain for-profit institutions and filed borrower defense claims.
• PHEAA/FedLoan PSLF Settlement (2020): Settlement requiring improved processes for handling PSLF applications, better communication with borrowers, and specific remediation for borrowers whose qualifying payments were miscounted.
• Great Lakes Credit Reporting Settlement (2022): $50 million settlement over allegations that Great Lakes improperly reported borrowers' payment status to credit bureaus during the COVID-19 payment pause, damaging credit scores.
• Nelnet SCRA Settlement (2020): Settlement compensating military borrowers who were allegedly denied interest rate reductions they were entitled to under the Servicemembers Civil Relief Act.

These settlements often include both monetary compensation and requirements for servicers to reform their practices, such as improving training for customer service representatives, implementing better documentation systems, and providing clearer information to borrowers.

How to Participate in Student Loan Class Actions

If you're a student loan borrower who may have been affected by servicer misconduct, here's how to participate in relevant class actions:

• Stay informed: Monitor news about lawsuits against your loan servicer. The Student Borrower Protection Center, National Consumer Law Center, and Project on Predatory Student Lending regularly provide updates on major student loan litigation.
• Check settlement websites: When settlements are reached, administrators typically create dedicated websites where borrowers can check eligibility and submit claims.
• Watch for notices: If you're part of a certified class, you should receive notice of the lawsuit and any settlement by mail or email. Make sure your contact information is up-to-date with your servicer.
• Maintain records: Keep detailed records of all communications with your servicer, especially if you've experienced issues with payment processing, application denials, or misleading information.
• Consider individual legal advice: If you've suffered significant harm due to servicer misconduct, consult with an attorney who specializes in student loan law about whether an individual lawsuit might be appropriate in addition to participating in any class actions.
• File complaints: Submit complaints about servicer misconduct to the Consumer Financial Protection Bureau, Department of Education Ombudsman, and your state attorney general. These complaints can both help resolve your individual issue and provide evidence for broader class actions.

Remember that most class members are automatically included in settlements unless they specifically opt out, but you typically need to submit a claim form to receive compensation.

Future of Student Loan Litigation

Several emerging issues are likely to drive future class actions against student loan servicers:

• PSLF Expansion Implementation: As the Department of Education expands and reforms the Public Service Loan Forgiveness program, litigation may focus on how servicers implement these changes.
• Income-Driven Repayment Changes: The introduction of the SAVE Plan (Saving on a Valuable Education) and ongoing reforms to income-driven repayment may generate new servicing challenges and potential litigation.
• Servicer Transitions: As loans continue to transfer between servicers (particularly following Navient and FedLoan's exits from federal servicing), litigation over lost records, payment processing errors during transitions, and miscounted qualifying payments is likely.
• Restart of Payments After COVID Pause: The return to repayment after the extended COVID-19 payment pause has created numerous servicing challenges, potentially giving rise to new claims.
• Debt Cancellation Implementation: The implementation of targeted debt cancellation programs (and potential broader forgiveness programs) will likely generate litigation if servicers fail to properly identify and process eligible borrowers.
• Bankruptcy Reforms: As policies regarding student loan discharge in bankruptcy evolve, litigation may address how servicers handle accounts of borrowers in bankruptcy.

As the student loan system continues to evolve, class action litigation will likely remain a critical accountability mechanism to address systemic servicing failures.

Conclusion

Class action lawsuits against student loan servicers have become an important tool for addressing widespread misconduct in an industry that affects millions of Americans. These cases have not only provided compensation to borrowers who suffered financial harm due to servicing errors but have also driven significant policy changes and improved servicing practices.

For student loan borrowers, understanding your rights, maintaining detailed records of your interactions with servicers, and staying informed about relevant class actions can help you protect yourself from servicing abuses and potentially benefit from settlements when your rights have been violated. As the student loan system continues to evolve, class action litigation will likely remain a crucial mechanism for ensuring that servicers fulfill their obligations to borrowers.