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Lawsuit Challenges U.S. Departments of Education and Justice Over Illegal Denials of Federal Loan Consolidations

Jan. 30, 2019: Legal Aid Foundation of Los Angeles (LAFLA) filed a lawsuit in federal district court this week against the U.S. Department of Education (DOE) and U.S. Department of Justice (DOJ), on behalf of a former student of a now-defunct for-profit college. The lawsuit challenges a longstanding policy that prevents borrowers from consolidating their defaulted federal student loans—which has likely led to the denial of thousands, if not hundreds of thousands, of loan consolidation applications throughout the country.

“By implementing this policy, the DOJ and DOE have erected an unlawful barrier to higher education for student loan borrowers who are primarily low-income, and have likely caused severe financial hardship to many of these borrowers and their families,” said Staff Attorney Josephine Lee.

Plaintiff Richard Johnney, Jr. has struggled to repay a $900 federal student loan he obtained in 1999, when he attended Wright Business School—but withdrew after one month due to the poor quality of education he received. Since then, the DOE has twice seized Mr. Johnney’s tax refund to collect on his defaulted student loan and is now demanding he repay approximately $1600. Mr. Johnney is currently unemployed and looking to return to school so he can improve his opportunities to better support his fiancée, who is battling cancer. But Mr. Johnney can only obtain federal financial aid to fund his fresh start at a legitimate school if he can get his federal loan out of default.

In September 2018, the DOE denied Mr. Johnney’s Direct Consolidation Loan application despite the fact that his defaulted loan met all federal eligibility requirements. While Defendants claimed that Mr. Johnney’s loan was not eligible for consolidation, it appears the denial was based solely on the fact that Mr. Johnney’s loan had been placed with the DOJ for collection, which the DOE routinely does. Federal law explicitly states that if loans are otherwise eligible for Direct Loan Consolidation, they lose that eligibility only when they are reduced to a court judgment that is still outstanding: The law does not authorize the DOE or DOJ to deny a Direct Consolidation Loan application simply because an underlying loan has been transferred to the DOJ for collection.

“If the impacted borrowers had been allowed to consolidate out of default after their loans were transferred to the DOJ for collection, many of them could have prevented court judgments from being entered against them. Now, with judgments against them, federal law provides no avenue out of default and no way to reestablish federal financial aid eligibility or to stop wage garnishments, tax refund seizures, or federal benefit offsets,” added Attorney Lee.

Mr. Johnney seeks a court judgment ordering the DOJ and DOE to approve his Direct Consolidation Loan application. He also seeks a declaration that the DOJ and DOE’s policy is illegal under the Higher Education Act and its regulations. View a copy of the complaint.

If borrowers believe their applications for Direct Loan Consolidation have been unlawfully denied on this basis, they are encouraged to call Legal Aid Foundation of Los Angeles at 800-399-4529.

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