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Student loan reform group sues Education Secretary Betsy DeVos and CFPB Director Kathy Kraninger

Aarthi Swaminathan
Finance Writer

A group of consumer advocates is suing both the Department of Education and America’s consumer watchdog for allegedly siding with predatory student loan servicers over millions of indebted borrowers amid a $1.5 trillion student debt crisis.

Democracy Forward, a nonprofit legal organization on behalf of the nonprofit advocacy group Student Debt Crisis, brought the lawsuit against the Trump administration — specifically Education Secretary Betsy DeVos, Consumer Financial Protection Bureau (CFPB) Director Kathy Kraninger, and their respective agencies — for “shirking their legal obligation” in supervising student loan servicers, especially those who handle federal loans.

“We are suing Education Secretary Betsy DeVos and CFPB Director Kathy Kraninger for ignoring student loan industry abuses at a time when stronger consumer protection laws are desperately needed,” Student Debt Crisis Executive Director Natalia Abrams said in a statement. “The Trump administration is breaking the law and our supporters can no longer trust the government to work in their best interests. They truly feel they have no one to turn to.”

Yahoo Finance reached out to the CFPB and the DOE for comment and will update accordingly.

Specifically, the lawsuit asserts that the administration violated the Administrative Procedure Act, which allows someone “suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action” to seek judicial review of that action.

“Failure by loan servicers to comply with legal requirements can add significant costs to individual borrowers,” the lawsuit states. “Supervision by an independent financial regulator is therefore a crucial component of a well-functioning student loan market as well as the financial health of the tens of millions of Americans with student debt.”

(Graphic: David Foster)

Trump officials accused of propping up a broken student loan system

The group alleged three particularly egregious abuses: Kraninger failing to recognize that the CFPB has authority over all student loans and not just private loans, Kraninger hiring an industry insider to fill a role that looks after borrowers (student loan ombudsman), and DeVos refusing to coordinate with the CFPB by revoking a Memorandum of Understanding and refusing to produce information relating to student loans.

The student loan crisis has left millions of borrowers in financial hardship, with many holding loans that are going delinquent or in default. The vast majority of the outstanding student loans are federal, meaning borrowers owe their debts to the government. The system has been categorized as fundamentally brokenrigged, and an abomination, due to “widespread misconduct, miscounted payments, unnecessarily prolonged repayment, and growing debt burden,” the group noted.

Graduates at Barnard College's graduation ceremony in New York May 14, 2012. (Photo: TIMOTHY A. CLARY/AFP/GettyImages)

Student loan borrowers have also alleged serious failures with the Education Department’s Public Student Loan Forgiveness program meant for public servants. Due to dismal acceptance rates in the single digits, the fiasco has resulted in a few lawsuits, including one from one of the largest teachers’ unions.

“The Trump administration’s failure to do its job exposes a trillion-dollar blind spot at the heart of our economy,” Seth Frotman, former CFPB student loan ombudsman and current executive director of the Student Borrower Protection Center, which is supporting this lawsuit, said in the press release. “These practices are alarmingly similar to the lax oversight of the mortgage market before its meltdown. Today’s action is a warning to Director Kraninger and Secretary DeVos — ignoring industry abuses is unacceptable. It’s time to do your jobs and to stand up for borrowers.”

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami

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