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Appeals Court Overturns Lower Court Ruling That Exempted Student Loan Servicer From State Law Claims

The Court of Appeals for the Seventh Circuit has overturned a lower court’s decision that the federal Higher Education Act exempts companies servicing student loans from claims that those companies violated state law.

A copy of the ruling in the case of Nelson v. Great Lakes Educational Loan Services, Inc., can be accessed by clicking here.

The defendant was accused of violating the Illinois Consumer Fraud and Deceptive Business Practices Act by making statements on its website such as “Our trained experts work on your behalf,” and “You don’t have to pay for student loan services or advice,” because “Our expert representatives have access to your latest student loan information and understand all of your options.”

A District Court judge granted the company’s motion to dismiss, ruling that the Higher Education Act — § 1098g –pre-empted any state law claims made by the plaintiff. But the Seventh Circuit determined the lower court’s ruling was “overly broad.”

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. Great Lakes chose to make them. A borrower who reasonably relied on them to her detriment is not barred by § 1098g from bringing state‐law consumer protection and tort claims against the loan servicer. Tort law has long recognized the difference between mere failures to disclose information and affirmative deceptions.

The defendant was originally charged with steering the plaintiff into a forbearance and deferment programs instead of income-driven repayment plans when she switched jobs and subsequently was laid off.

Had the defendant not made such affirmative disclosures on its website, it likely would not have been subject to the state law and would have been covered under the Higher Education Act.

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