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Win: Fourth Circuit Rules That National Student Loan Agency Is Not Immune From Suit

Oct. 21, 2015

Win: Fourth Circuit Rules That National Student Loan Agency Is Not Immune From Suit

In Case With National Implications, Court Rules That Pennsylvania Higher Education Assistance Agency Is Not an Arm of the State

WASHINGTON, D.C. – The Fourth U.S. Circuit Court of Appeals held today (PDF) that the Pennsylvania Higher Education Assistance Agency (PHEAA) is not an arm of the state of Pennsylvania and therefore can be sued by any of the thousands of students who do business with it.

The ruling came in the case of a Virginia man, Lee Pele, who sued PHEAA under the Fair Credit Reporting Act for misattributing to him loans that were not his. Public Citizen attorney Scott Michelman argued the case on Pele’s behalf. The ruling means that Pele’s case can go forward.

The appeal was one of the first to address whether state-affiliated student loan entities have sovereign immunity. The outcome of the case likely will 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.

“Today’s decision is a win for student borrowers nationwide and for corporate accountability,” Michelman said. “By rejecting the argument that this national loan servicer is above the law, the court ensures that PHEAA can be held accountable for its actions.”

In 2013, Pele, a Fairfax County, Va., resident, received calls from a debt collector about tens of thousands of dollars in defaulted student loans – loans that were not Pele’s. Pele saw these loans on his credit report, and he disputed the erroneous reports with the credit reporting agencies and with the loan servicer, PHEAA. PHEAA refused to delete the loans from Pele’s file. As a result, Pele was denied a mortgage loan and endured credit problems.

Pele sued PHEAA for violating his rights under the Fair Credit Reporting Act. In October 2014, a district court found that PHEAA was immune from suit because it was an “arm of the state” of Pennsylvania and therefore entitled to partake of Pennsylvania’s sovereign immunity.

In the Fourth Circuit, Michelman argued that PHEAA could not be an arm of the state because most of its business is out of state, it is financially independent of the state, and the state is not liable for its debts.

The court agreed, explaining that PHEAA is not an arm of the state because “PHEAA is financially independent from the Commonwealth,” because PHEAA “exercises control over its commercially generated revenues” and because PHEAA “sets policy and makes the substantive fiscal and operational decisions” for itself.

PHEAA, which also operates under the names American Education Services and FedLoan Servicing, holds, services or guarantees more than $100 billion in loans to students all over the country. Its chief financial officer has estimated that it is the tenth largest loan servicer in the country with respect to federal loans alone.

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.

Hugo Blankingship and Tom Christiano of Blankingship & Christiano in Reston, Va., represent Pele in the trial court and were co-counsel with Public Citizen on the appeal.

Read the decision and learn more about the case.