CHICAGO (CN) — A student loan servicer may be liable for promising to advise distressed student loan borrowers on how to manage their financial situation, then steering them into plans that benefited lenders, forcing the students to pay more, the Seventh Circuit ruled Thursday.
Like millions of other students, Nicole Nelson financed her college education with federal student loans. She began repaying the loans in 2009, but her income dropped when she changed jobs four years later. Nelson contacted her loan servicer, Great Lakes Educational Loan Services, which offers guidance to borrowers struggling with repaying their loans.
On its website, Great Lakes promised, “Our trained experts work on your behalf,” “You don’t have to pay for student loan services or advice,” and “Our expert representatives have access to your latest student loan information and understand all of your options.”
A representative advised Nelson that “forbearance,” was her best option. Forbearance allows a temporary pause in payments, but unpaid interest is capitalized, which can greatly increase monthly payments when the forbearance period ends.
A few months later, Nelson lost her job. When she contacted Great Lakes again, a representative steered her into “deferment,” which is another way of pausing loan payments, but without accruing interest.
She says she was never informed about income-based repayment plans, which federal law requires loan servicers to offer. Income-based plans set monthly loan payments as a percentage of a borrower’s discretionary income, but, according to Nelson, these plans are less lucrative for lenders and the enrollment process is time-consuming for the loan servicer.
A federal judge ruled for Great Lakes, finding that Nelson’s allegations all pertain to information Great Lakes’ representatives supposedly failed to disclose, and are preempted by the Higher Education Act.
But the Seventh Circuit reversed Thursday, saying the district court’s ruling was “overly broad.”
“When a loan servicer holds itself out to a borrower as having experts who work for her, tells her that she does not need to look elsewhere for advice, and tells her that its experts know what options are in her best interest, those statements, when untrue, cannot be treated by courts as mere failures to disclose information,” Seventh Circuit Judge David Hamilton wrote for the three-judge panel. “Those are affirmative misrepresentations, not failures to disclose. Great Lakes chose to make them.”
Seventh Circuit Judges Michael Kanne and Amy St. Eve joined the opinion.
“Many of Nelson’s specific claims allege that Great Lakes misled her and other class members by making affirmative misrepresentations — about its expertise and its devotion to borrowers’ best interests, and in recommending forbearance as the best option for borrowers in financial trouble,” the 24-page opinion states.
While the Higher Education Act preempts state-law disclosure requirements, it does not bar Nelson’s effort to hold Great Lakes accountable under Illinois consumer protection and tort law, the Chicago-based appeals court held.
“Nelson’s claims of affirmative deception do not necessarily imply any additional disclosure requirements at all,” Hamilton said. “She is complaining about at least some deceptive statements that Great Lakes chose to make voluntarily, not because federal law required them. Great Lakes could have avoided these claims by remaining silent.”