New York Legal Assistance Group v. Cardona

Background

New York Legal Assistance Group (NYLAG) challenged regulations issued by the United States Department of Education (ED) concerning defenses that student borrowers may raise against repayment of federal student loans. The challenged regulations were issued in 2019 after ED conducted negotiated rulemaking and notice-and-comment rulemaking under the Higher Education Act and the Administrative Procedure Act (APA), the federal law governing many agency rulemaking procedures.

NYLAG alleged that ED violated the Higher Education Act by failing to conduct negotiated rulemaking in good faith; violated the APA by failing to reopen or restart the notice-and-comment process after an earlier rule took effect; and violated the APA by adding a three-year statute of limitations for defensive borrower-defense claims that was not a logical outgrowth of the proposed rule. NYLAG also argued that several changes in the 2019 Rule were arbitrary and capricious, meaning inadequately explained or unsupported by the administrative record.

The parties filed cross-motions for summary judgment. In this agency-review setting, the court treated the dispute as a legal review of ED’s action rather than applying the usual factual-dispute test used in ordinary summary-judgment proceedings.

Procedural and Rulemaking Challenges

The court granted summary judgment to ED on NYLAG’s claim that ED acted in bad faith during negotiated rulemaking. The record showed discussions over multiple days with industry and student representatives, including discussion of arbitration agreements and class-action waivers. ED’s statements that it could not provide extensive information about issues involved in litigation, and that some matters had already been considered, did not show that ED had stonewalled the process or treated it as an empty formality.

The court also granted summary judgment to ED on NYLAG’s claim that ED had to reopen the administrative record after the 2016 Rule took effect. NYLAG did not identify specific new information, prejudice, or a likely difference in the rule’s substance resulting from ED’s decision not to reopen the process.

The court reached a different result on the three-year limitations period for defensive borrower-defense claims. The 2018 proposed rule discussed a three-year limit for affirmative claims, but stated that defensive claims could be raised during collection proceedings and that the proposal did not impose a statute of limitations on those claims. Because the final 2019 Rule added a three-year limit despite those statements, the court held that the limit was not a logical outgrowth of the proposal. The public therefore was not fairly informed that the limit was being considered and lacked a meaningful opportunity to comment on it.

Challenges to Specific Regulatory Changes

The court granted summary judgment to ED on NYLAG’s arbitrary-and-capricious challenges to the other identified changes in the 2019 Rule. The court upheld ED’s explanations for narrowing the misrepresentation standard, requiring written documentation, and requiring proof of financial harm beyond the loan debt. The court also upheld ED’s elimination of a group claims process, concluding that ED had identified rational concerns involving individualized harm, burdens on ED and taxpayers, and possible effects on students’ professional prospects.

The court upheld ED’s decision not to use a specific formula for calculating relief, because ED explained that it wanted individualized determinations based on each borrower’s monetary loss. The court also upheld provisions allowing schools to impose mandatory pre-dispute arbitration agreements and class-action waivers if they were disclosed to prospective borrowers. ED had provided reasons involving the efficiency and cost of arbitration, possible savings for students, and individualized borrower choice.

The court further upheld ED’s elimination of specified disclosure requirements for for-profit institutions and automatic closed-school loan discharges. ED had explained that the disclosure requirements could be misleading or harmful and that automatic discharges could discourage students from completing their education. The court did not address NYLAG’s separate arbitrary-and-capricious challenge to the three-year defensive-claims limitation because that issue was being remanded for the procedural defect already identified.

Remedy and Disposition

The court determined that remand to ED, rather than vacatur of the 2019 Rule, was the appropriate remedy. The court noted that summary judgment was granted only concerning the three-year limitations period, while most of the 2019 Rule remained unaffected, and that vacating the entire rule could disrupt students asserting borrower defenses.

Judge Lorna G. Schofield granted NYLAG’s motion for summary judgment on its claim that the three-year statute of limitations on defensive claims was not a logical outgrowth of the rulemaking process. The court granted ED’s motion for summary judgment on the remaining claims, remanded the matter to ED for further proceedings consistent with the opinion, and directed the clerk to close the motion and the case.