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Pfeiffer v. Duncan

October 5, 2009


The opinion of the court was delivered by: Emmet G. Sullivan United States District Judge


Student loan borrower Brenda Kay Pfeiffer has brought this breach of contract action against the U.S. Secretary of Education, the Department of Education, and the United States (collectively "DOE" or "defendants"). Plaintiff alleges that defendants violated the terms of the promissory note governing her student loan repayment plan, and has moved for partial summary judgment on the issue of liability. Defendants have also filed a motion for summary judgment. The question before the Court is whether the promissory note executed by plaintiff contractually authorizes defendants to capitalize interest that accrued during the period between defendants' receipt of plaintiff's June scheduled payment and June 30 -- the date on which DOE annually capitalizes accrued interest -- for those years when plaintiff's loan was in a "negative-amortization condition" under the Income Contingency Repayment Plan ("ICRP") in which she participated. Upon consideration of the motions, responses and replies thereto, the applicable law, the entire record, and for the reasons stated below, the Court GRANTS IN PART AND DENIES IN PART both parties' motions.

I. Background

A. DOE's Direct Loan Program

DOE lends money to students pursuing post-secondary education through the William D. Ford Direct Loan Program (the "Direct Loan Program"). Borrowers participating in the Direct Loan Program are given a number of repayment plans from which to choose, see 34 C.F.R. § 685.208; Defs.' Mot. at 4 n.2, one of which is the ICRP. Under the ICRP, a borrower's scheduled monthly payment is determined by a formula based on "adjusted annual income, family size and the principal balance of the loan." Pl.'s Statement of Undisputed Material Facts ("Pl.'s Statement") ¶ 8; see 34 C.F.R. § 685.209(a) (explaining calculation of borrower's repayment amount under ICRP). Because the monthly scheduled payments of borrowers participating in the ICRP are based primarily on their income rather than on the amount of their loan, the scheduled payment can sometimes be an amount less than the interest accruing on their loans each month. Pl.'s Statement ¶ 10; Defs.' Mot. at 7. DOE designates these loans as being in a negative-amortization condition. See Pl.'s Mot. at 2; Defs.' Statement of Material Facts as to Which There Are No Genuine Issues to Be Tried ("Defs.' Statement") ¶ 21.

Individuals who obtain student loans from DOE pursuant to the Direct Loan Program execute identical or substantially identical form promissory notes. Pl.'s Statement ¶¶ 1-2. The promissory note contains "the terms and conditions of the loan, including how and when the loan must be repaid." Pl.'s Statement ¶ 2 (internal citations and quotation marks omitted).

When a student borrower's loan enters repayment, DOE assigns each borrower a monthly "payment due date" of the 7th, 14th, 21st, or 28th of each month.*fn2 Pl.'s Statement ¶ 6; Tr. of Nov. 14, 2008 Mot. Hr'g ("Tr.") at 45, 56. When the agency receives a payment on a student loan, it applies the payment "first to any accrued charges and collection costs, then to any outstanding interest, and then to outstanding principal." 34 C.F.R. § 685.211(a)(1). On each monthly due date, DOE bills the borrower for the interest that has accrued as of his or her payment date. Pl.'s Mot. at 2. Interest that accrues after a borrower's monthly due date is not billed until the borrower's next monthly due date the following month. Pl.'s Mot. at 2.

B. DOE's Capitalization of Interest

Borrowers participating in the ICRP who are in a negative-amortization condition may be subject to the capitalization of certain interest that accrues on their loans. As defined by 34 C.F.R. § 685.202(b)(1), capitalization is the process of increasing the principal balance of a loan by "add[ing] unpaid accrued interest to the borrower's unpaid principal balance." DOE's form promissory notes describe the agency's practice of capitalizing interest as follows:

Interest. Except for interest [DOE] does not charge me during an in-school, grace or deferment period, I agree to pay interest on the principal amount of my Direct Consolidation Loan from the date of disbursement until the loan is paid in full or discharged. [DOE] may add interest that accrues but is not paid when due to the unpaid principal balance of this loan, as provided under the Act. This is called capitalization.

Pl.'s Mot. at Ex. 6 (form promissory note used in 2001); Defs.' Mot. App. at 27 (same).

DOE regulations also address the agency's authority to capitalize interest, but the regulatory language differs somewhat from the language contained in the form promissory notes. Specifically, 34 C.F.R. § 685.202(b) states that "the Secretary [of Education] annually capitalizes unpaid interest when the borrower is paying under the [ICRP] and the borrower's scheduled payments do not cover the interest that has accrued on the loan." Id. § 685.202(b)(4).

The standard form promissory notes executed by borrowers also contain a section relating to governing law. See Pl.'s Mot. at Ex. 3. That provision of the promissory note states that

[t]he terms of this [promissory note] will be interpreted in accordance with the Higher Education Act of 1965, as amended (20 U.S.C. 1070 et seq.), the U.S. Department of Education's... regulations, as they may be amended in accordance with their effective date, and other applicable federal laws and regulations (collectively referred to as the "Act").

Id.; Defs.' Mot. App. at 30.

Since at least March 19, 2001, DOE has been capitalizing interest accrued on loans in a negative-amortization condition not paid as of June 30 each year, a date that is not specified in the regulations but is chosen by the agency for administrative reasons. See Pl's Statement ¶ 11; Tr. at 37, 44-45. These interest-capitalization procedures are based upon a borrower's scheduled payment amount, regardless of the amount of the borrower's actual payments and payment due date. Defs.' Statement of Genuine Issues ¶ 11, attached to Defs.' Mot. ("Defs.' Opp'n Statement"). Moreover, the unpaid accrued interest annually capitalized on June 30 includes interest accruing after receipt of the borrower's June payment through June 30. Id.

C. Plaintiff's Participation in the Direct Loan Program

Plaintiff graduated from chiropractic school in 1994 with multiple DOE student loans. Compl. ¶ 7. She executed two variable interest rate notes with the agency in 1997, and another note in November 2001 that consolidated her loans and "locked in" a fixed interest rate. See Pl.'s Statement ¶¶ 13-14; Defs.' Statement ¶¶ 1-2, 7. Since she executed the 2001 promissory note, plaintiff has participated in the Federal Direct Consolidation Loan Program, one of the four program components of the Direct Loan Program which "provides loans to borrowers to consolidate certain Federal educational loans." 34 C.F.R. § 685.100(a)(4); Defs.' Mot. at 3 n.1. Plaintiff has at all times elected to use the ICRP for repayment of her loan. Defs.' Statement ¶ 6.

Plaintiff's monthly scheduled payments were less than the amount of interest that accrued on her loan in the years ending June 30, 2002; June 20, 2004; and June 30, 2005. Defs.' Mot. at 7. In those years, plaintiff was not contractually required to make payments that covered the entire amount of interest accruing on her loan. Defs.' Mot. at 7. Because plaintiff's scheduled monthly payments were less than the amount of monthly interest accruing on her loan, her loan was designated in negative-amortization condition for these years, and defendants capitalized all unpaid interest as of June 30 in those years. Defs.' Mot. at 7.

Plaintiff's actual monthly loan payments since November 2001 have been timely and at an amount "equal to or greater than the interest accrued in the previous month as estimated by [DOE]." Compl. ΒΆ 16. Thus, even though plaintiff's scheduled monthly payments for the years in question did not cover the entire amount of the interest accruing on her loan, plaintiff's actual ...

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