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For Student Loan Defaulters, It’s Payback Time
Class action accuses collection company of violating state, federal law
When Cheryl Ellis learned she had an opportunity to restore her credit record after defaulting on student loans, she jumped at the chance. Under the federal program, she believed all she had to do was make nine loan payments within a 10-month period.
So, when she started to receive letters from the debt collector telling her she had to make nine consecutive payments, she was a little surprised. When she was informed she was cut off from the program after she dutifully made seven payments and then missed one, she was shocked.
“I was devastated,” she said. “I was at work. I was crying; it was a payment I could not afford.”
The letters essentially meant that if the Bloomfield resident, who owed $225,000 after earning three degrees, wanted to restore her credit rating, she would have to begin making the nine consecutive monthly installments of $1,700 all over again. She did just that. But the letters from the debt collection service eventually sparked a class action lawsuit – recently certified by a federal judge – over alleged unfair debt collection practices.
The suit, filed in U.S. District Court in New Haven, has vast implications for tens of thousands of college graduates nationwide who have been unable to keep up with payments on six-figure loans amid a moribund economy, according to plaintiffs’ attorneys. At issue is whether the communications from debt collector General Revenue Corp. violated the federal Fair Debt Collection Practices Act and the Connecticut Unfair Trade Practices Act.
The case was filed by attorneys Daniel S. Blinn, of the Consumer Law Group in Rocky Hill; Joshua R.I. Cohen, a former clerk for Blinn who now has a Hartford solo practice; and Manhattan attorney Brian Lewis Bromberg. The defendants, represented by David Hartsell of McGuireWoods in Chicago and Eric D. Daniels of Robinson & Cole, recently lost a summary judgment motion before U.S. District Judge Christopher F. Droney and have filed an appeal.
Cohen, who has built his practice around such complaints, said the stakes are high because student loan debt is nearly impossible to discharge through bankruptcy.
“How many were not permitted to bring their loan out of default?” asked Cohen. “If they can’t rehabilitate, they are facing collection fees [and] wage and income tax garnishment. They have a black spot on their record; it can stop them from buying a home.”
The federal fair debt collection law prohibits misleading or harassing communications to consumers from third-party debt collectors. Remedies range up to $500,000 for a class action, actual damages for individuals and attorney fees, according to Blinn.
Attorneys for the defendants said they were not at liberty to comment, but they argued in court that the initial communications were sent to Ellis and others more than a year before the lawsuit was filed; the federal act has a one-year statute of limitations. The class includes 237 plaintiffs under the federal act and 313 under state law, which has a three-year statute of limitations.
The federal regulation at issue states: “The borrower must voluntarily make at least nine of the ten payments required under a monthly repayment agreement” and all nine must be “received within a ten-month period that begins with the month in which the first required due date falls and ends with the ninth consecutive calendar month following that month.”
General Revenue Corp. sent letters stating that “nine consecutive monthly payments … must be received timely” or the offer was “null and void.”
The plaintiffs cite guidance from the U.S. Department of Education informing borrowers they have 10 months to make nine payments. They also claim that the series of letters sent by General Revenue Corp. to borrowers were in and of themselves violations of the law.
“The statute reads that you have to make nine payments in 10 months; it’s our belief they are allowed to skip a payment,” said Cohen. “We have both a wording violation and the actual conduct violation.”
Ellis is among tens of thousands of college graduates who fell behind on loans. Amid the recession, student loan default rates soared to 7 percent in fiscal 2008, the highest since 1997, according to the U.S. Department of Education. In 2010 the Federal Family Education Loan program and Federal Direct Loan Program had $713.4 billion in outstanding loans, and about $50 billion of that was in default.
The government hires private debt collectors and collects as much as $1.22 for each dollar of debt after costs and penalties are considered, according to a recent report in the Wall Street Journal.
For Ellis, the trouble began long before the suit was filed in July 2009. She started paying back loans from the bachelor’s degree she received from Wellesley College and the master’s she received from the New School for Social Research in New York. When she returned to school for the doctorate in clinical psychology she ultimately received from the University of Hartford, she was able to defer the loans, but not the interest.
At some point, she consolidated the loans and started paying again after she received her doctorate. “I was paying the amount I could. According to them, it wasn’t the full amount.”
She was then advised she could rehabilitate her credit via the federal program. Ultimately, she did so, the second time around, but had to put other bills on the back burner, work extra hours and seek help from family already cash-strapped. As a result, she still has a negative credit history today.
Still, she says, there is no question she will pay back the student loans.
“The way I was raised was that, if there’s a rule to be followed, you do your best to follow it,” she said. “If someone was able to provide me the opportunity to go to school, then, for me not to contribute back to provide that opportunity for someone else? I know that the money that goes back in helps to contribute to someone else’s education.”
Ellis, who is single, is currently working at a crisis center and trying to help her parents pay for the care of a nephew while paying off her debt.
Attorney Cohen says the suit stems from a problem that is epidemic, particularly among those paying back loans for professional degrees. A 2007 graduate of the Quinnipiac University School of Law, he often counsels fellow lawyers with six-figure loan debt even as he keeps current on his own obligations. “The two professions I meet with the most are psychologists and lawyers,” he said. “I’ve dealt with lawyers who can’t get through the student loan system.”