The Seventh Circuit recently held that the federal Higher Education Act does not preempt state law consumer protection and tort claims where student loan servicers made affirmative misrepresentations to borrowers regarding repayment options. As such, student loan servicers should be aware that representations they make to borrowers may be subject to state consumer protection laws.
The Seventh Circuit, in Nelson v. Great Lakes Educational Loan Services Inc., No. 18-1531 (7th Cir. June 27, 2019), reversed the dismissal of a class action brought by student loan borrowers alleging that their loan servicer misled them regarding their repayment options. The plaintiff, Nelson, alleged that her loan servicer—which communicated with borrowers about the repayment of their loans and assisted borrowers with alternative repayment plans—steered borrowers away from income-driven repayment plans and towards more burdensome options like forbearance.
When Nelson contacted Great Lakes about alternative repayment plans, a Great Lakes representative did not inform her of income-driven repayment plans that were available, and instead steered her towards forbearance. Nelson argued that forbearance was not appropriate for borrowers experiencing long‑term financial difficulties like those she was facing, and that Great Lakes intentionally steered her away from other plans that would have been more appropriate for her situation.
Nelson brought claims for violations of Illinois’s Consumer Fraud and Deceptive Business Practices Act, as well as claims for fraud and negligent misrepresentation under Illinois common law. The district court granted dismissal in favor of Great Lakes, finding that each of Nelson’s claims were premised on Great Lakes allegedly failing to disclose certain information to her, and were thus preempted by the federal Higher Education Act (“HEA”) because the HEA expressly provides that student loan servicers are “not  subject to any disclosure requirements of any State Law.” (See 20 U.S.C. § 1098g.)
The Seventh Circuit, however, held that the district court’s ruling was overly broad, and drew a distinction between a failure to disclose and an affirmative misrepresentation.
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. Those are affirmative misrepresentations, not failures to disclose.
As such, the court held that the HEA does not preempt the state law consumer protection and tort claims of a borrower who reasonably relied on a loan servicer’s representations.
As a result of this ruling, student loan servicers should be aware going forward that representations they make to borrowers regarding alternative repayment plans may very well be subject to state consumer protection laws. The Seventh Circuit’s ruling suggests that just because a representation by a student loan servicer involves the disclosure of information, it does not necessarily fall under the preemptive protections of the HEA which shield student loan servicers from complying with state disclosure requirements. Rather, in contrast to merely failing to make a disclosure that would otherwise have been required under state law, student loan servicers remain liable for affirmative misrepresentations.