Student-Loan Contractor Seeks to Throw Out Mismanagement Suit

(Bloomberg) -- A major U.S. student-loan contractor urged a judge in Boston to throw out a lawsuit accusing the company of mismanaging a federal program that allows forgiveness of loans to borrowers who take government and nonprofit jobs.

Massachusetts in August sued the Pennsylvania Higher Education Assistance Agency, which does business as FedLoan and oversees billions of dollars of loans. The suit alleges FedLoan made mistakes that drove up costs for borrowers in a decade-old federal program that allows students who choose to take lower-paying public-service jobs to erase unpaid debt after 10 years of payments.

Earlier in the week, the U.S. Department of Education filed a "statement of interest" in the case, urging the court to dismiss some of Massachusetts’ claims because they are preempted by federal law. During a hearing in Boston Wednesday, John C. Grugan, an attorney for FedLoan, called the intervention "momentous" and said the federal government hasn’t filed such a statement since 1963.

Massachusetts Assistant Attorney General Shennan Kavanagh said FedLoan is subject to state laws and consumer-protection statutes and that the state is seeking restitution for economic harm to borrowers.

Judge Kenneth Salinger declined to immediately rule on the motion to throw out the case, saying his decision will take a few days.

To contact the reporters on this story: Chris Dolmetsch in New York State Supreme Court in Manhattan at cdolmetsch@bloomberg.net, Janelle Lawrence in Boston at jlawrence62@bloomberg.net.

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Paul Cox

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