Posted May 19, 2006 by

Will A Lawsuit Resuscitate Reconsolidation of Student Loans? We Can Only Hope So…

Two American education loan borrowers and an education loan finance company (OneSimpleLoan of Oldsmar, FL) filed suit on April 18, 2006 in U.S. District Court of the Southern District of New York against the U.S. Department of Education. The suit resulted because of a little known provision in the Deficit Reduction Omnibus Reconciliation Act of 2005, that will on July 1, 2006, terminate the right of middle class Americans to refinance their consolidation loan debts under the Federal Family Education Loan Program, made even worse by the unpublicized and obscurely worded letter of the U.S. Department of Education that terminated those rights three months earlier by bureaucratic fiat.


As a result of language in Section 8009 of the DRA that few can decipher, FFEL consolidation loan borrowers will lose the right to refinance their debts. As a result, tens of thousands of middle class Americans, who borrow to attend college or send their children to college, will lose their right to refinance their FFEL consolidation loans in order to obtain better benefits and/or lower rates. The refinancing mechanism has become increasingly popular in recent years, with billions of dollars of loans refinanced through it, although not publicized by the Department of Education.
What’s more, the legislation, which passed Congress by only one vote, and which many constitutional scholars have branded unconstitutional, cannot be reconciled against either the stated principles of the Democrats or the Republicans.
The Democrats have long supported programs to make education financing more affordable to middle class Americans and the right to refinance fixed rate consolidation loans with competitively priced loans achieves that aim.
Most Republicans support making education affordable. Generally, they also stress improving competition and increasing revenue to the federal treasury. The refinancing mechanism – which the DRA will cancel – stimulates competition among consolidation loan lenders. The refinancing mechanism also provides revenue to the government that more than covers the processing costs and is otherwise revenue neutral.
The decision of the Department of Education to move the termination date up by three months defied common sense. As a result, two borrowers and an education finance company have today asked the federal court to enjoin it as against the public interest, unlawful, unreasonable, arbitrary and capricious at least until July 1st, so that as many borrowers as possible can benefit from competitive refinancing before the new law takes effect.
The lawsuit, OneSimple Loan, et al. v. U.S. Secretary of Education, et al., 2006 Civ. 2979 (S.D.N.Y., filed Apr. 18, 2006), also challenges the constitutionality of the DRA.
Source: PRNewswire

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