Sweet v. Cardona

Background

The plaintiffs were a certified class of federal student-loan borrowers who had submitted applications asking the Department of Education to discharge their loans because of alleged wrongful acts or omissions by the schools they attended. They alleged that the Department unlawfully delayed processing the applications and, later, used brief form denials and a presumption-of-denial policy rather than properly reviewing claims.

The settlement divided borrowers into three groups. Approximately 200,000 borrowers who attended one of 151 schools listed in Exhibit C would receive full, automatic relief, including federal-loan discharges, refunds of amounts paid to the Department, and credit repair. Approximately 64,000 other borrowers would receive written decisions through a streamlined process, with automatic relief if the Department missed specified deadlines. Borrowers who submitted applications after the settlement was executed but before final approval would receive streamlined review within three years, with automatic relief if the Department failed to decide their applications within that period.

Four schools—American National University, The Chicago School of Professional Psychology, Everglades College, Inc., and Lincoln Educational Services Corporation—were allowed to intervene permissively to object to the settlement. They challenged the Secretary’s authority, argued that Exhibit C stigmatized the listed schools, and contended that the case was moot, that the plaintiffs lacked standing, and that the settlement was unfair or otherwise improper.

Authority to Settle

Judge William Alsup held that the Secretary had authority to enter the settlement. He relied primarily on 20 U.S.C. § 1082(a)(6), which authorizes the Secretary to “enforce, pay, compromise, waive, or release” obligations, and 20 U.S.C. § 1087e(a)(1), which he found extended the relevant authority to both Federal Family Education Loan and Direct Loan programs. The court also recognized the federal government’s broad authority to settle litigation, while noting that settlement authority cannot authorize conduct the agency could not lawfully undertake.

The court rejected the schools’ argument that the settlement presented a major question requiring clearer congressional authorization. It concluded that the settlement was limited to the class in this litigation and did not fundamentally transform a national industry or authorize cancellation of every federal student loan. The court also rejected arguments based on a rescinded Department memorandum, an anti-injunction provision, ordinary borrower-defense regulations, and notice-and-comment rulemaking. The settlement created a process for resolving the backlog in this litigation but did not alter the Department’s generally applicable borrower-defense regulations.

Exhibit C and the Schools’ Objections

The court held that Exhibit C did not invalidate the settlement. Listing a school did not impose liability, did not constitute a binding finding of misconduct, and did not eliminate the schools’ procedural protections in any future Department proceeding. The settlement itself was not an approved borrower-defense claim and therefore could not by itself support a recoupment action against a school. The court further held that reputational harm alone, without a related liberty or property interest, did not establish a due-process violation on the facts presented.

Standing and Mootness

The court held that the plaintiffs had standing, meaning they had shown a concrete injury that could be addressed by judicial relief. The alleged delay, suspension of processing, and form-denial policy caused economic harm by delaying possible debt relief. The court also held that the case was not moot because many applications remained pending and five of the seven named plaintiffs still had pending applications and outstanding loans. President Biden’s separate student-debt-relief initiative did not eliminate the plaintiffs’ standing or moot this separate settlement.

Fairness of the Settlement

Under Federal Rule of Civil Procedure 23, a class settlement must be fair, reasonable, and adequate. The court found that the class remained viable, that the plaintiffs and class counsel adequately represented the class, and that the settlement was negotiated at arm’s length. The court concluded that different levels of relief for different borrower groups were equitable because the groups had waited different lengths of time and the settlement used stated criteria concerning application volume and alleged misconduct indicators.

The court found that the relevant settlement factors favored approval. It emphasized the complexity and likely expense of continued litigation, the extensive relief offered, the government’s participation, and the class members’ reaction. More than 1,500 letters and emails were submitted during the approval process, most supporting the agreement, while fewer than 175 borrowers objected or requested changes.

Disposition

Judge William Alsup overruled all objections and granted final approval of the settlement. The action was dismissed with prejudice, except that the court retained jurisdiction as provided in the settlement agreement. The parties were directed to notify the court after the defendants provided the required relief, and a joint status report was ordered for January 26, 2023.