Good News for Public-Interest Lawyers at the DC District Court: Despite a Mixed Ruling, Judge Provides Reprieve for Certain Previously Denied Loan Forgiveness Applicants

By Seth Kugler

In a partial victory for certain student-loan debtors planning to use the Department of Education’s (the “Department”) federal student-loan forgiveness program, the United States District Court for the District of Columbia issued a ruling in February regarding the Department’s decision to reverse its determination on whether certain organizations were “qualified public service organizations” for purposes of the 2007 Public Service Loan Forgiveness (“PSLF”) law.^[1] The February 22, 2019 decision by District Judge Timothy J. Kelly granted and denied parts of both Plaintiffs’ and the Department’s motions for summary judgment, but the ruling was largely a victory for the Plaintiffs’ cause. The Department was found to have arbitrarily and capriciously changed at least two of the standards it used to determine whether certain non-profit employers other than those classified under 26 U.S.C.A. § 501(c)(3) (West) were “qualified public service organizations” (“QPSOs”). This is a major victory for anyone hoping to use the PSLF program but who had been told their employer was not a QPSO because it did not meet either the “Primary Purpose” standard for non-501(c)(3) non-profit public services generally or the “School-Like Setting” standard for educational services. A third standard, the “Outright Provision of Services” standard for determining QPSO status of organizations assisting the disabled or elderly, was upheld.

The 2007 College Cost Reduction and Access Act, PL 110–84, September 27, 2007, 121 Stat 784, established the PSLF program. The program requires the Department to cancel the balance and principal of qualifying student loans belonging to individuals who (1) make ten years of monthly loan payments, (2) are not in default on their loans, and (3) are employed in a “public service job” at the time of each qualifying payment and at the time of loan forgiveness.^[2] In October 2008, the Department issued procedures for a borrower to apply for loan forgiveness, which defined the statutory term “employed in a public service job.”^[3] The Department defined this based on the status of the employer as a QPSO rather than the specific job description of the employee. A “public service organization” was defined as any government organization, 501(c)(3) non-profit, or any other non-profit that provides qualifying services and does not engage in disqualifying activities.^[4]

In order to determine what non-501(c)(3) non-profits were QPSOs, the Department enacted certain standards, though when these standards were enacted was a matter of dispute. The court analyzed three of these standards: (1) the “Primary Purpose” standard, which required the “primary purpose” of a non-501(c)(3) non-profit to provide qualifying public services;^[5] (2) the “School-Like Setting” standard, which required public education QPSOs to provide qualifying services “in a school or school-like setting”;^[6] and (3) the “Outright Provision of Services” standard, which required an organization assisting the disabled or elderly to provide services to those groups “outright” rather than merely “facilitate” the provision of services.^[7] The “Primary Purpose” and “School-Like Setting” standards were struck down by the Court, which determined they were the product of arbitrary and capricious Department action, while the “Outright Provision of Services” standard was allowed to stand due to lack of evidence that it had ever been changed.

The case was brought by five plaintiffs: the American Bar Association (“ABA”), which claimed that the Department wrongfully reversed the decision to classify it as a qualifying public service organization, and four individuals. Each of the individual plaintiffs claimed that they made what they were told would be qualifying payments under the PSLF program but then were later informed that their payments did not qualify. Although this did not explicitly factor into the decision, each of the Plaintiffs were enrolled in an income-based repayment plan, at least partly in reliance on the Department’s prior approval of their employer as a QPSO, and each saw their loan balances actually increase due to the fact that their monthly payment amount was less than the interest on their loans.

The Plaintiffs brought five claims against the Department, the first four under the Administrative Procedure Act (APA), 5 U.S.C.A. § 500 (West) et seq., and a fifth on due process grounds.^[8]Count I alleged that the Department acted in an arbitrary and capricious manner when it changed how it interpreted its regulations to disqualify non-501(c)(3) non-profits from QPSO status. All but one of the individual plaintiffs won on summary judgment as to Count I, so the court did not reach the merits of counts II-V as to the “Primary Purpose” or “School-Like Setting” standards. The last individual plaintiff could not provide any evidence that the Department had changed the “Outright Provision of Services” standard, rather than simply corrected a prior error, when they revoked their prior approval of his employer as a QPSO. Thus, for lack of evidence of a change in the standard, the “Outright Provision of Services” standard survived each of Plaintiffs’ first four counts. As to the fifth count for due process violations, the Court determined that there was merely an expectation of a property interest, not a true “legitimate claim of entitlement.” Thus, the “Outright Provision of Services” standard was upheld as a matter of law on summary judgment.^[9]

The ABA’s claims were subject to summary judgment due to lack of standing, as the Department’s letters to the ABA regarding its status as a qualifying public service organization were deemed not to be “final agency actions,” subject to judicial review. ^[10] Although the Department argued that letters notifying the individual plaintiffs their employment did not qualify were not final agency actions either, the court disagreed and moved on to the merits of their claims.

Addressing the individual plaintiffs’ claims related to the “Primary Purpose” and “School-Like Setting” standards, the Court easily found the changes to be arbitrary and capricious. Although they addressed other evidence, as well, the Court appeared to find that the Department’s mere unwillingness to even acknowledge that a change had been made to the standards “effectively precluded it from satisfying the APA’s basic procedural requirements.”^[11] The court quoted the Supreme Court’s decision in FCC v. Fox,^[12] stating that an agency “is required to display awareness that it is changing its position and [may not] depart from a prior policy sub silentio or simply disregard rules that are still on the books.” Although extra-record evidence, which the court admitted through granting of a motion brought by Plaintiffs,^[13] showed that the Department had only recently created or modified these standards,^[14] the Department refused to admit this, even when before the Court.^[15] The court further determined that the Department had “failed to provide even [a] minimal level of analysis” and thus its action was “arbitrary and capricious and . . . cannot carry the force of law.”^[16]

Although the ruling was mixed, and may still be appealed, overall, this was an important victory for public-interest lawyers across California and the country, who are not employed by the government or a 501(c)(3) non-profit and hope to use the federal government’s loan forgiveness programs. All attorneys and others hoping to use this program should be sure to use the program’s Employment Certification Form, which alerted the plaintiffs to their situation, and can be found at the following link: https://myfedloan.org/documents/repayment/fd/pslf-ecf.pdf.

Seth Kugler is an Attorney at Duane Morris LLP’s San Francisco office with experience handling all aspects of litigation. Seth’s practice has a diverse subject base, with particular concentrations in Real Estate and Joint Venture/Partnership disputes. He is admitted to State and Federal Courts in California and New York.

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[1] Am. Bar Ass’n v. United States Dep’t of Educ., No. CV 16-2476 (TJK), 2019 WL 858770 (D.D.C. Feb. 22, 2019).

[2] Id. at *2.

[3] See 34 C.F.R. § 685.219.

[4] See 34 C.F.R. § 685.219(b).

[5] Am. Bar Ass’n v. United States Dep’t of Educ., No. CV 16-2476 (TJK), 2019 WL 858770, at *15 (D.D.C. Feb. 22, 2019).

[6] Id. at *17.

[7] Id. at *18.

[8] Id. at *1.

[9] Id.at *18.

[10] Id.at *7. The Department’s letters to the ABA did not meet the definition of “final agency decision” because they did not determine any of the ABA’s rights or obligations under the statute, since the ABA, as an employer, had no rights or obligations under the statute. For similar reasons, the letter to the ABA was not an action from which “legal consequences would flow.” Without either of these, the letter to the ABA could not be deemed to be a final agency decision, even though it “marked the consummation of the agency decision-making process.” Id.

[11] Am. Bar Ass’n, supra, at *19.

[12] Id. (quoting F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 515, 129 S. Ct. 1800, 173 L. Ed. 2d 738 (2009), internal quotations omitted).

[13] Am. Bar Ass’n, supra, at *2.

[14] Id. at *16-*17.

[15] Id. at *15, *17.

[16] Id.at *19 (citing Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2125, 195 L. Ed. 2d 382 (2016), internal quotations omitted).