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United Student Aid Funds, Inc. v. King

United States District Court, District of Columbia

August 5, 2016

United Student Aid Funds, Inc., Plaintiff,
John B. King, Jr., Secretary of the U.S. Department of Education, et al., Defendants.



         On July 10, 2015, the United States Department of Education issued a “Dear Colleague Letter” addressing when a “guaranty agency” may assess “collection costs” to a defaulting borrower. Guaranty agencies are private entities that purchase defaulted student loans from primary lenders and then attempt to bring the borrowers back into compliance, an industry practice known as loan rehabilitation. Collection costs, as the term implies, are costs incurred by the guaranty agency in attempting to collect on a defaulted student loan. The Dear Colleague Letter established that guaranty agencies cannot charge a defaulting borrower with collection costs if, within 60-days of being notified of loan rehabilitation alternatives, the borrower enters into a repayment agreement and then complies with all its terms. The Department explained in the Dear Colleague Letter that its regulations, issued pursuant to the Higher Education Act of 1965, prohibit the imposition of collection costs in such circumstances.

         Plaintiff United Student Aid Funds, Inc., is a guaranty agency. It challenges the Department’s conclusion in the Dear Colleague Letter in two general respects. First, it argues that the announced prohibition on assessing collection costs conflicts with both the Higher Education Act and its implementing regulations. Second, it contends that the manner in which the Department issued the Dear Colleague Letter violated certain procedural requirements imposed by the Administrative Procedure Act.

         A common issue rests at the heart of both of these challenges: Did the Dear Colleague Letter announce a “new rule”? Or, more precisely, did the Department switch from allowing guaranty agencies to assess collection costs to barring that very practice? Two important legal consequences flow from the answers to those questions. If the Dear Colleague Letter is a new rule, the Administrate Procedure Act requires the Department to have acknowledged its changed position and to have provided a good reason for the change. If the Department failed to abide by those procedural requirements, this court would owe no deference to the agency’s interpretation of its own regulations. On the other hand, if the Dear Colleague Letter did not announce a new rule, then the agency’s interpretation of its own regulations would be entitled to deference.

         Unlike most Administrative Procedure Act cases, this matter comes to the court on a Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). As a result, also unlike most Administrative Procedure Act cases, the court does not have the benefit of an administrative record that evidences the agency’s decision-making process. It has only the Dear Colleague Letter itself and the parties’ legal arguments.

         A second consequence of the case’s present posture is the lens through which the court must view Plaintiff’s Complaint. The court must accept Plaintiff’s factual allegations as true and grant Plaintiff the benefit of all inferences that can be derived from those allegations. Here, Plaintiff has alleged that prior to the Department’s issuance of the Dear Colleague Letter, the Department had not interpreted the Higher Education Act to prohibit charging collection costs to any class of defaulted borrowers; that guaranty agencies had long assessed such costs to defaulted borrowers who entered into repayment agreements; and that the Department had been aware of and acquiesced in this industry practice, as evidenced by the lack of enforcement actions or contrary guidance.

         Accepting those allegations as true and granting Plaintiff the benefit of all inferences derived therefrom, the court concludes that Plaintiff has sufficiently pleaded that the Dear Colleague Letter created a new rule. As a consequence, the court finds that Plaintiff has plausibly asserted a claim that the Department did not procedurally comply with the APA in issuing the Dear Colleague Letter. The Dear Colleague Letter neither acknowledges that it announced a new rule nor does it explain why the Department deviated from its past position. That lack of procedural compliance, if proven true, also would mean that the court would owe no deference to the Department’s interpretation of its own regulations.

         In the end, however, the merits of this case cannot be resolved on a motion to dismiss. Instead, the court first must resolve the factual question of whether the Dear Colleague Letter announced a new rule. That factual question can be resolved only on a motion for summary judgment, after the parties have presented the administrative record and any additional facts. Accordingly, as further explained below, the court denies Defendants’ Motion to Dismiss in its entirety.

         The Higher Education Act of 1965, 20 U.S.C. § 1001 et seq. (the “Act”), governs federally funded student loan programs. The Act includes the Federal Family Education Loan Program (“FFELP”), 20 U.S.C. §§ 1071 to 1087-4, which “encourages private lenders to make student loans by providing that the Secretary of Education pay part of the student’s interest and costs and by guaranteeing loan repayment.” Educ. Credit Mgmt. Corp. v. D.C., 471 F.Supp.2d 116, 116 (D.D.C. 2007) (citing 20 U.S.C. § 1078(a) & (c)). Pursuant to FFELP, private lenders make loans to students, while “guaranty agencies” guarantee the loans, paying the lender the outstanding balance and taking control of the loan if the student defaults. See 20 U.S.C. § 1078(c). The Secretary of Education, in turn, “reinsures” the loans by reimbursing guaranty agencies for their “losses (resulting from the default of the student borrower) on the unpaid balance of the principal and accrued interest of any insured loan.” Id. § 1078(c)(1)(A). See also Armstrong v. Accrediting Council for Continuing Educ. & Training, Inc., 168 F.3d 1362, 1364 (D.C. Cir. 1999), opinion amended on denial of reh’g, 177 F.3d 1036 (D.C. Cir. 1999) (describing FFELP’s regulatory framework).

         FFELP and its implementing regulations set forth a complex structure that governs numerous distinct relationships, transactions, and circumstances that arise in the universe of student loans. This case, however, focuses on one narrow piece of that universe-the relationship and transactions between defaulted borrowers and guaranty agencies-and on one particular circumstance-when a defaulted borrower enters into a “rehabilitation agreement” with a guaranty agency promptly after default, and proceeds to comply with that agreement. Narrower still, it raises only one discrete question about that circumstance: Can a guaranty agency impose collection costs on the aforementioned sub-class of defaulted borrowers? See Compl., ECF No. 1, at ¶¶ 4, 7 (“[T]he Department stated for the very first time that guaranty agencies ‘may not’ assess collection costs to defaulted borrowers in certain circumstances, namely, when a defaulted borrower enters into a rehabilitation agreement within sixty days of notice of default, and complies with that agreement. . . . USA Funds seeks an order from this Court declaring th[at new rule] invalid, unenforceable, and contrary to law.”); Defs.’ Mot. to Dismiss, ECF No. 6 [hereinafter Defs.’ Mot.], at 1 (“Plaintiff . . . challenges the Department[’s] . . . interpretation of its own regulations governing when a guaranty agency may charge collection costs to a student loan borrower who enters into a repayment agreement promptly after defaulting on a loan.”).

         The Court of Appeals for the Seventh Circuit recently addressed that precise question in a case brought against Plaintiff United Student Aid Funds (“USA Funds”), Bible v. United Student Aid Funds, 799 F.3d 633 (7th Cir. 2015) reh’g denied, 807 F.3d 839 (7th Cir. 2015), cert. denied, 136 S.Ct. 1607 (2016). Bible was not brought under the Administrative Procedure Act (“APA”), 5 U.S.C. § 500 et seq. Instead, Bible was a private class action, alleging common law breach of contract and a violation of Racketeer Influence and Corrupt Organizations Act, 18 U.SC. § 1961 et seq. See Bible, 799 F.3d at 638. The plaintiffs’ claims in Bible, as here, turned on whether, under the Higher Education Act and its implementing regulations, USA Funds properly could assess collection costs on a defaulted borrower who had entered into a rehabilitation agreement within sixty days of receiving notice of default and had complied with that agreement. The trial court held that the collection of such costs was permitted and dismissed the plaintiffs’ suit. See Bible v. United Student Aid Funds, Inc., No. 1:13-cv-00575-TWP-TAB, 2014 WL 1048807 (S.D. Ind. Mar. 14, 2014).

         The case then proceeded to the Seventh Circuit. On appeal, the Seventh Circuit asked the Secretary of Education, which had not participated in the trial court proceedings, to file an amicus brief addressing “whether and under what circumstances the . . . Act, as amended, and its regulations allow a guaranty agency participating in [FFELP] to assess collection costs against a first-time defaulted borrower who (1) timely enters into a rehabilitation agreement with the guarantor upon receiving notice that the guarantor has paid a default claim and (2) complies with that agreement.” Bible v. USA Funds, Inc., No. 14-cv-1806, ECF No. 34, at 2 (7th Cir. Jan. 28, 2015); see also Bible, 799 F.3d at 643 (“After oral argument, we invited the Secretary of Education to file an amicus brief addressing his interpretation of the relevant statutory framework and federal regulations.”).

         On August 18, 2015, the Seventh Circuit issued a divided opinion reversing the trial court’s decision. The panel majority opinion was written by Judge Hamilton, who elected to “apply the Secretary[’s] . . . interpretation of the applicable statutes and regulations . . . that a guaranty agency may not impose collection costs on a borrower who is in default for the first time but who has timely entered into and complied with an alternative repayment agreement.” Bible, 799 F.3d at 639. In Judge Hamilton’s view, the Secretary had put forward “the best interpretation of the statutes and regulations.” Id. at 645. Alternatively, Judge Hamilton wrote that the Secretary’s interpretation should be upheld because of the deference owed to the Secretary as the administrator of FFELP. Id. at 650 (“Even if the preceding analysis does not provide the best interpretation of the statutory framework and accompanying regulations, the . . . same result would still be correct based on the deference we owe to the Secretary of Education, who is tasked with administering the FFELP and issuing the implementing regulations.”).

         It was this alternative argument regarding deference that garnered a majority. Judge Flaum, concurring in part and concurring in the judgment, disagreed with Judge Hamilton “that the text of the regulations unambiguously supports Bible’s [and the Secretary’s] interpretation of the statutory and regulatory scheme.” Id. at 661 (J. Flaum, concurring). “Instead, ” Judge Flaum “f[ou]nd the regulatory landscape sufficiently complex to merit deference to the agency’s reasonable interpretation, ” id., and citing the Supreme Court’s decision in Auer v. Robbins, 519 U.S. 452 (1997), “join[ed] that portion of Judge Hamilton’s analysis that relies on administrative deference, ” id. at 663. In a dissenting opinion, Judge Manion found that the implementing regulations unambiguously permit “collection costs for rehabilitated loans, ” and, accordingly, found “the Department’s interpretation . . . plainly erroneous, ” “inconsistent with the regulation, ” and ...

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