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Pennsylvania Higher Education Assistance Agency – One of Nation’s Largest Student Loan Servicers – Should Not Be Immune From Consumer’s Lawsuit

Dec. 22, 2014

Pennsylvania Higher Education Assistance Agency – One of Nation’s Largest Student Loan Servicers – Should Not Be Immune From Consumer’s Lawsuit

Representing Virginia Student, Public Citizen Appeals to Fourth Circuit

WASHINGTON, D.C. – The Pennsylvania Higher Education Assistance Agency (PHEAA) – one of the nation’s largest student loan servicers – should not be immune from suit for violating the Fair Credit Report Act, Public Citizen told the Fourth U.S. Circuit Court of Appeals today in a brief.

The outcome of the case could affect the legal remedies available to thousands of student borrowers and their families. Little case law exists addressing the question of whether most state loan guarantee agencies have “sovereign immunity” – that is, whether they are treated like states themselves and are therefore immune from lawsuits seeking damages for any type of wrongdoing.

In 2013, Fairfax County, Va., resident Lee Pele sued PHEAA under the federal Fair Credit Reporting Act, alleging that PHEAA had failed to correct inaccurate reports stating that Pele had defaulted on tens of thousands of dollars in student loans – loans that were not, in fact, his. PHEAA sent those erroneous reports to credit agencies, threatening to hamper Pele’s plans to finish graduate school and buy a home.

A district court in October found that PHEAA was immune from suit because it is an arm of the state. Public Citizen is representing Pele in the appeal.

Scott Michelman, the Public Citizen attorney representing Pele, explained, “This case is about holding a major financial corporation accountable for its actions. PHEAA does more than $100 billion worth of student-loan business. The fact that PHEAA is affiliated with a state should not entitle it to operate with impunity.”

In addition to Pele’s lawsuit, PHEAA is defending a separate case claiming that it defrauded the federal government and another case claiming that it violated its employees’ rights under federal and state wage-and-hour laws. In each of these cases, PHEAA has asserted that sovereign immunity requires dismissal.

“For my generation, student loans are such a big part of our lives, so it’s unfathomable that this huge loan agency wouldn’t be responsible when they make mistakes that affect borrowers’ lives so significantly,” said Pele, 28, who is finishing his MBA at George Mason University. “I never want anyone else to experience what I did – having my credit history marred by debts that aren’t mine and to have to put my life on hold.”

PHEAA was created in 1963 by the Pennsylvania Legislature. In 2008, it stopped lending directly to students; now it primarily services and guarantees loans for students nationwide. It also operates under the names American Education Services and FedLoan Servicing.

Although it was established by the state, it does not meet the legal test for being an arm of the state, Public Citizen argues, because:

  • PHEAA’s operations are financially independent of state funding;
  • The state is not legally or functionally liable for a judgment against PHEAA;
  • More than two-thirds of PHEAA’s loan guarantee and loan servicing businesses (which together account for more than 90 percent of PHEAA’s business) consist of non-Pennsylvania loans;
  • PHEAA’s own legal filings in 2010 and 2011 identified it as a “citizen of Pennsylvania,” a status that is legally incompatible with being an arm of the state;
  • The Fourth Circuit in United States ex. rel. Oberg v. PHEAA held earlier this year that PHEAA was not an arm of the state.

Hugo Blankingship and Tom Christiano of Blankingship & Christiano in Reston, Virginia, represented Pele in the trial court and are co-counsel with Public Citizen on the appeal.

Read the brief and learn more about the case.