CFPB Lawsuit Against PHEAA: What Student Borrowers Need to Know
Understand the CFPB’s lawsuit against PHEAA, how discharged student loans should be treated after bankruptcy, and what rights borrowers have.
The Consumer Financial Protection Bureau (CFPB) has filed a federal lawsuit against the Pennsylvania Higher Education Assistance Agency (PHEAA), which services loans under the name American Education Services (AES). The CFPB alleges that PHEAA illegally collected on student loans that were discharged in bankruptcy and reported inaccurate information about those loans to credit reporting companies.
This article explains what the case is about, the laws involved, how private student loans interact with bankruptcy, and what the enforcement action could mean for borrowers whose loans are handled by PHEAA or other servicers.
Background: Who Is PHEAA and What Does It Do?
PHEAA is a public corporation established under Pennsylvania law that acts as a major student loan servicer and guaranty agency. It operates nationally under the brand name American Education Services (AES).
- Headquarters: Harrisburg, Pennsylvania
- Role: Services private student loans and has also serviced some federal loans
- Scale: As of December 2023, it serviced roughly $17.8 billion in student loans.
As a loan servicer, PHEAA handles billing, collects payments, communicates with borrowers, and reports account information to credit reporting companies.
The CFPB’s Enforcement Action: What Is Alleged?
On May 31, 2024, the CFPB filed a lawsuit in federal court alleging that PHEAA violated federal consumer financial laws through its treatment of certain private student loans following borrowers’ bankruptcy discharges.
According to the CFPB’s complaint and public statements, the agency alleges that PHEAA:
- Failed to identify when some private student loans had been discharged in bankruptcy.
- Continued to collect or attempt to collect on loans that had been discharged.
- Reported inaccurate information about discharged loans to credit reporting companies.
- Sent misleading billing statements and letters implying that discharged debts were still owed.
The Future of AI: Preventing a Big Tech Monopoly >
The CFPB is asking the court to order PHEAA to stop the alleged illegal conduct, provide relief to affected borrowers, and pay a civil money penalty.
Key Legal Standards Involved
The case centers on how student loan servicers must behave under several federal laws. The CFPB’s complaint relies primarily on two frameworks: the Consumer Financial Protection Act (also known as the Consumer Financial Act of 2010) and the Fair Credit Reporting Act (through its implementing regulation, Regulation V).
Consumer Financial Protection Act (CFPA)
The CFPA, part of the Dodd–Frank Act, prohibits covered entities from engaging in unfair, deceptive, or abusive acts or practices in connection with consumer financial products or services. The CFPB alleges that PHEAA’s handling of discharged student loans violates these standards by:
- Treating certain discharged loans as if they were still collectible.
- Communicating to borrowers that payments were still due when, in fact, legal obligations had been extinguished.
- Maintaining inadequate policies and procedures to prevent these harms.
Fair Credit Reporting Act (FCRA) and Regulation V
The Fair Credit Reporting Act governs the accuracy and integrity of information furnished to credit reporting companies. Regulation V, issued by the CFPB and other regulators, requires furnishers of credit information to establish reasonable written policies and procedures to ensure the accuracy of the data they report.
The CFPB alleges that PHEAA violated Regulation V by failing to implement appropriate policies for accurately reporting the status of loans that had been discharged in bankruptcy, which led to incorrect information being furnished about borrowers’ debts.
Student Loans and Bankruptcy: When Can They Be Discharged?
Many borrowers believe that student loans can never be discharged in bankruptcy. While federal student loans are difficult to discharge and usually require a showing of “undue hardship” in an adversary proceeding, some private student loans can be discharged under the standard rules that apply to other unsecured debt.
Key points about dischargeability of student loans include:
- Some non-qualified or non–Title IV private education loans are treated like ordinary consumer debt and may be discharged in a standard bankruptcy discharge.
- Other types of education loans, including many federal loans and certain private loans used only for qualified education expenses, typically require a separate court determination of undue hardship for discharge.
- Recent litigation and policy guidance have clarified that some loans previously treated as “always nondischargeable” in practice are in fact dischargeable under the Bankruptcy Code.
The CFPB and other federal agencies have emphasized that servicers and collectors must respect bankruptcy discharge orders and correctly determine when education-related debt has been wiped out.
What the CFPB Says PHEAA Did Wrong
Based on public court filings and CFPB statements, the alleged misconduct can be grouped into several categories.
1. Inadequate Policies for Recognizing Discharged Loans
The CFPB asserts that PHEAA did not maintain adequate written policies and procedures to identify which private student loans it serviced had been discharged in bankruptcy.
- PHEAA allegedly treated nearly all private student loans as if they survived bankruptcy unless it received an explicit court order or specific direction from the loan owner.
- Some private loans that should have been treated as discharged were instead left on the books as collectible.
2. Collecting on Debts That Were No Longer Owed
The CFPB alleges that between 2017 and 2021, PHEAA collected or attempted to collect on thousands of private student loans after borrowers had gone through bankruptcy, including at least 177 loans that were eligible for discharge.
Borrowers allegedly faced:
- Billing statements demanding payment on discharged debts.
- Collection contacts that suggested ongoing obligations.
- Pressure to pay debts that, under law, no longer existed.
3. Furnishing Inaccurate Credit Information
The CFPB claims that PHEAA reported discharged loans as if they were still owed, causing borrowers’ credit reports to show outstanding balances or delinquencies that should not have appeared.
- This conduct allegedly violated the accuracy standards of the FCRA and Regulation V.
- Inaccurate reporting can lower credit scores and make it harder for consumers to obtain mortgages, car loans, or other forms of credit.
4. Misleading Communications to Borrowers
According to the CFPB, PHEAA sent billing statements and other communications that falsely suggested borrowers still owed payments on debts discharged in bankruptcy.
- Letters allegedly implied that nonpayment would lead to negative consequences.
- Borrowers who relied on those statements may have made payments on debts they no longer legally owed.
Potential Harm to Borrowers
When a servicer attempts to collect debts that have been discharged, the consequences for borrowers can be significant.
| Type of Harm | How It Affects Borrowers |
|---|---|
| Financial loss | Borrowers may pay thousands of dollars on debts that legally no longer exist. |
| Credit damage | Incorrect reporting of discharged debts can lower credit scores and limit access to future credit. |
| Legal confusion | Borrowers may be misled about the effect of bankruptcy and their obligations going forward. |
| Emotional distress | Receiving bills and collection threats after bankruptcy can create stress and undermine the fresh start that bankruptcy is meant to provide. |
What Relief the CFPB Is Seeking
In its lawsuit, the CFPB has asked the court to impose several forms of relief.
- Injunctive relief: Court orders that would require PHEAA to stop the alleged unlawful practices and adopt policies to prevent similar harms in the future.
- Consumer redress: Monetary compensation or other relief for borrowers who paid or were harmed because their discharged debts were treated as collectible.
- Civil money penalty: A financial penalty payable to the government, designed to deter future violations.
- Other appropriate relief: Any additional measures the court finds necessary to remedy and prevent consumer harm.
How This Case Fits into Broader Oversight of Student Loan Servicers
The CFPB and state attorneys general have scrutinized student loan servicers for years over issues ranging from payment misallocation to misinformation about income-driven repayment and loan forgiveness.
- State enforcement actions and settlements have previously alleged that PHEAA mismanaged certain federal loan programs, such as Public Service Loan Forgiveness (PSLF) and TEACH Grants, by providing inaccurate information and mishandling applications.
- Advocacy organizations have documented borrower complaints about servicing errors, delays, and miscommunications by PHEAA and other servicers.
- Separately, bankruptcy litigation has challenged industry-wide practices of collecting on education-related loans that should be treated as dischargeable consumer debts.
The CFPB’s suit over discharged private loans continues this pattern of enforcement aimed at ensuring that servicers follow legal standards and treat borrowers fairly.
Practical Steps for Borrowers With PHEAA-Serviced Loans
Borrowers whose loans are or were serviced by PHEAA can take several concrete steps to monitor their accounts and protect their rights, especially if they have gone through bankruptcy.
1. Confirm the Status of Your Loans After Bankruptcy
- Obtain copies of your bankruptcy discharge order and any related documents from the court.
- Review your loan types and determine which ones may have been discharged; consult with a qualified bankruptcy attorney if needed.
- Compare your discharge documents with current statements from your servicer to see which loans are still being billed.
2. Check Your Credit Reports Regularly
- Access your credit reports from the nationwide credit reporting companies.
- Look for student loans that should show a zero balance or discharged status but are reported as active or delinquent.
- Dispute any inaccuracies with both the credit reporting company and the furnisher (such as your servicer), following FCRA procedures.
3. Keep Records of All Communications
- Save billing statements, letters, emails, and notes of phone conversations with your servicer.
- If a loan you believe is discharged is still being collected, document each instance of contact or attempted collection.
- Written records can be important if you later file complaints or consult an attorney.
4. Use Available Complaint and Enforcement Channels
- File a complaint with the CFPB if you believe a servicer is collecting on discharged debt or reporting it inaccurately.
- Consider contacting your state attorney general or state consumer protection office, which may have ongoing investigations or settlements covering certain servicers.
- Seek legal advice if collection activity appears to violate the bankruptcy discharge or other laws.
SEO-Focused FAQ: PHEAA, Bankruptcy, and the CFPB Case
Q1: Why did the CFPB sue PHEAA?
The CFPB sued PHEAA because it alleges the company illegally collected on private student loans that had been discharged in bankruptcy and furnished inaccurate information about those loans to credit reporting companies, in violation of the Consumer Financial Protection Act and Regulation V under the Fair Credit Reporting Act.
Q2: Are private student loans always non-dischargeable in bankruptcy?
No. While many education loans are more difficult to discharge than typical unsecured debts, certain private student loans—especially non-qualified or non–Title IV loans—can be discharged in a standard bankruptcy proceeding, without an undue-hardship determination, if they do not meet statutory criteria for nondischargeability.
Q3: How could PHEAA’s alleged conduct affect my credit?
If a servicer reports a discharged loan as active or delinquent, it can lower your credit score and make it harder to obtain new credit or favorable interest rates. The CFPB alleges that PHEAA furnished inaccurate information about discharged loans, harming borrowers’ credit profiles in the process.
Q4: What should I do if I think my discharged loan is still being collected?
You should review your bankruptcy paperwork, gather recent statements, and consider seeking legal advice. You can dispute the debt in writing, request verification from the collector, and file complaints with the CFPB and relevant state authorities. Keeping detailed records of all communications is essential.
Q5: Does this lawsuit automatically cancel my student loans?
No. The CFPB’s lawsuit is aimed at stopping alleged illegal practices and obtaining relief for affected borrowers, but it does not itself rewrite your individual loan obligations. Whether your loans are discharged or still enforceable depends on your specific loan types, bankruptcy case, and applicable law. You may need to consult a professional to review your situation.
References
- Pennsylvania Higher Education Assistance Agency (PHEAA) d/b/a American Education Services or AES – Enforcement Action — Consumer Financial Protection Bureau. 2024-05-31. https://www.consumerfinance.gov/enforcement/actions/pennsylvania-higher-education-assistance-agency-pheaa-dba-american-education-services-or-aes/
- Federal Lawsuit Alleges Student Loan Servicer Illegally Collects Loans Discharged in Bankruptcy — Thompson Law Office (summarizing CFPB action). 2024-06-04. https://thompsonlawoffice.net/877/federal-lawsuit-alleges-student-loan-servicer-illegally-collects-loans-discharged-in-bankruptcy/
- CFPB Sues Student Loan Servicer PHEAA for Pursuing Borrowers for Loans Discharged in Bankruptcy — Consumer Financial Protection Bureau Newsroom. 2024-06-04. https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-student-loan-servicer-pheaa-for-pursuing-borrowers-for-loans-discharged-in-bankruptcy/
- Frequently Asked Questions about the Attorney General’s PHEAA Settlement — Massachusetts Office of the Attorney General. 2022-04-21. https://www.mass.gov/info-details/frequently-asked-questions-about-the-attorney-generals-pheaa-settlement
- Pennsylvania Higher Education Assistance Agency — Student Borrower Protection Center. 2023-11-01. https://protectborrowers.org/what-we-do/federal-student-loans/federal-loan-servicing-abuse/pheaa/
- Nationwide Preliminary Injunction Secured in Student Loan Case — Fishman Haygood LLP. 2023-07-28. https://www.fishmanhaygood.com/news/fishman-haygood-secures-nationwide-preliminary-injunction-for-putative-class-of-debtors-pursued-by-creditors-over-dischargeable-student-loans/
Similar Articles
Read full bio of Sneha Tete
