Lawsuit alleges PHEAA illegally collects money that borrowers do not owe, reports false information to credit reporting companies

Today, the Consumer Financial Protection Bureau (CFPB) sued student loan servicer Pennsylvania Higher Education Assistance Agency (PHEAA), which does business as American Education Services (AES), for illegally collecting on student loans that have been discharged in bankruptcy and sending false information about consumers to credit reporting companies. The CFPB’s lawsuit asks the court to order PHEAA to stop its illegal conduct, provide redress to borrowers it has harmed, and pay a civil penalty.

“PHEAA has ignored its responsibilities and illegally pursued borrowers for loans they no longer owe,” said CFPB Director Rohit Chopra. “The CFPB is suing PHEAA for demanding money from borrowers that they do not owe and for reporting false information to credit reporting companies.”

PHEAA is a student loan servicer with its principal office in Harrisburg, Pennsylvania. It is a public corporation organized under the laws of the Commonwealth of Pennsylvania. As of December 2023, PHEAA serviced a portfolio of student loans worth roughly $17.8 billion.

The United States Bankruptcy Code provides consumers a financial fresh start by discharging debts and prohibiting creditors from collecting on discharged debts. Many student loans, both federal and private, can be discharged in bankruptcy only if a borrower initiates a separate proceeding and meets a more stringent legal standard than is applied to other debts. However, certain private student loans are discharged in normal bankruptcy proceedings like other unsecured consumer debt. These “non-qualified” private student loans include money borrowed to pay for tuition at schools that do not qualify for federal Title IV funding, such as unaccredited trade or K-12 schools, loans for medical and dental residency, loans to students attending school less than half-time, or loans where the loan amount was higher than the cost of attendance (which can occur when a loan is disbursed directly to a consumer).

AES services a range of private student loans, including those that have strict discharge requirements in bankruptcy and non-qualified loans that are routinely discharged. Nevertheless, when a consumer with private student loans serviced by AES receives a bankruptcy discharge, the company’s practice is to treat all of that consumer’s education-related loans as not discharged, unless it receives an explicit court order or other express direction from the loan owner. 

In March 2023, the CFPB issued a bulletin warning the industry about this issue, detailing how supervisory examinations had found some student loan servicers illegally returning loans to collections after bankruptcy courts had discharged the loans.

The CFPB alleges that PHEAA’s practices violate the Consumer Financial Protection Act and the Fair Credit Reporting Act’s implementing regulation. As a result of PHEAA’s practices, borrowers are forced to either pay debt they do not owe or risk being hit with negative information on their credit reports and default due to the purported non-payment.

Specifically, the CFPB alleges PHEAA harms consumers by:

• Failing to maintain policies and procedures to identify when loans are discharged by bankruptcy: AES fails to recognize that some private student loans are discharged in bankruptcy and instead treats nearly all private student loans as though the consumer still owes those debts.

• Illegally collecting on and furnishing inaccurate information about discharged loans: Between 2017 and 2021, AES collected or attempted to collect on approximately 7,934 private student loans after a bankruptcy proceeding. Although discovery in litigation will reveal the total scope of PHEAA’s unlawful collection activity, at least 177 were loans eligible for discharge in bankruptcy. Borrowers were thus subjected to illegal collections on loans they did not owe. AES also furnishes inaccurate information to credit reporting companies regarding borrowers’ outstanding debt, which causes financial harm to consumers and may make it harder to qualify for other credit in the future.

• Falsely telling borrowers they still owe payments on discharged loans: AES sends inaccurate and misleading repayment letters and billing statements to borrowers who no longer have any financial obligation to pay the discharged debts.

Enforcement Action

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions violating consumer financial laws, including the Fair Credit Reporting Act and engaging in unfair, deceptive, or abusive acts or practices. The CFPB’s lawsuit against PHEAA seeks a stop to alleged unlawful conduct, redress for affected consumers, the imposition of a civil money penalty paid into the CFPB’s victims relief fund, and other relief.

Read today’s complaint.

This is the CFPB’s second public enforcement action against PHEAA this year. On May 6 the CFPB filed a complaint and proposed stipulated judgment, which, if approved by the court, would require PHEAA and the National Collegiate Student Loan Trusts to pay more than $5 million for student loan servicing failures, including failing to provide accurate information to borrowers and incorrectly denying forbearance requests.

Consumers can submit complaints about financial products and services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).

Employees who believe their company has violated federal consumer financial protection laws are encouraged to send information about what they know to whistleblower@cfpb.gov. To learn more about reporting potential industry misconduct, visit the CFPB’s website.