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Massachusetts can sue federal student loan servicer, judge rules

BOSTON (Reuters) - Massachusetts’ attorney general can move forward with a lawsuit alleging that one of the largest student loan servicers in the United States has engaged in practices that have undermined a federal debt forgiveness program, a state court judge has ruled.

FILE PHOTO: Massachusetts Attorney General Maura Healey answers a question during an interview with Reuters at her office in Boston, Massachusetts, U.S., July 26, 2017. REUTERS/Brian Snyder/File Photo

Suffolk County Superior Court Judge Kenneth Salinger in a decision released on Thursday denied Pennsylvania Higher Education Assistant Agency’s motion to dismiss Massachusetts Attorney General Maura Healey’s lawsuit.

Healey, a Democrat, called the ruling “a victory for thousands of students and families in Massachusetts who have been victimized for too long by student loan servicers.”

PHEAA declined to comment on the judge’s ruling.

It had argued that as a quasi-governmental agency originally established by the state of Pennsylvania to provide student loans to its residents, it enjoyed sovereign immunity that protects it from being sued.

But Salinger noted that a federal appeals court in Virginia concluded in 2015 in a different case that PHEAA did not enjoy the same immunity as Pennsylvania from being sued.

Salinger also rejected Harrisburg, Pennsylvania-based PHEAA’s contention that the lawsuit could not proceed because Healey had not sued the U.S. Department of Education, which retained it to service federal student loans.

PHEAA noted that the U.S. Justice Department, arguing for the Education Department, filed papers in January arguing that Healey could not pursue claims under state law to the extent they conflicted with federal law.

Salinger said, however, that the Justice Department’s position “is much narrower than it may appear at first blush,” as it did not contend Healey’s claims were indeed pre-empted or that federal law allowed any of PHEAA’s alleged misconduct.

In August, Healey sued PHEAA, which does business as FedLoan Servicing and manages over a fourth of the nation’s $1.4 trillion student loan debt on behalf of various lenders.

The lawsuit accused PHEAA of deceptive practices that caused public servants to lose benefits and financial assistance under two federal programs, including one that forgives student loans after about 10 years of public-service work.

That program is the Public Service Loan Forgiveness. The other is the Teacher Education Assistance for College and Higher Education Grant program, which provides grants to borrowers pursuing teaching careers in low-income schools for at least four years.

Healey alleged that PHEAA prevented borrowers from making qualifying monthly payments that count toward loan forgiveness and also overcharged students.

Reporting by Nate Raymond in Boston; Editing by Susan Thomas and Peter Cooney