By: Monisha Rao
In U.S. v. Falcon, the United States Court of Appeals for the Ninth Circuit upheld that the Higher Education Technical Amendments of 1991 (“HETA”), which eliminated statutes of limitations on collecting defaulted student loans, did not violate student debtors’ due process rights when it allowed the U.S. Department of Education to collect loan payments that were defaulted prior to the enactment of HETA.
Between 1983 and 1991, Mark J. Falcon obtained guaranteed student loans or Stafford Loans totaling $47,900 as well as a guaranteed student loan from the Higher Education Loan Plan (“HELP”) totaling $4,000. Falcon signed promissory notes in order to obtain each of his loans stating that he would pay all amounts disbursed as well as interest and fees. The promissory notes were guaranteed by a guaranty agency that in turn was reinsured by the U.S. Department of Education. Falcon allegedly defaulted on the HELP Loan in 1993 and the Stafford Loan in 1997. The guaranty agency paid the defaulted loans and the U.S. Department of Education reimbursed the agency. On January 4, 2011 United States filed a case against Falcon and filed a motion for summary judgment. The United States claimed that Falcon owed a total of $112,563.51 on the Stafford Loans and $10,088.21 on the HELP Loan. The district court found in favor of the United States and Falcon filed a motion to the decision raising the constitutional argument that eliminating the statute of limitations for federal guaranteed student loan collection violates his due process rights. The district court denied Falcon’s motion and he subsequently appealed.
Falcon’s main argument was that HETA violates the due process clause because it creates a perpetual cycle of debt for a certain class of borrowers.[1] Falcon argued that eliminating the statute of limitations of student loan debt collection violates due process because it creates “oppressive effects and has created a special hardship.”[2]
The Ninth Circuit Court of Appeals relies on other circuits in holding that HETA and its retroactive effect do not violate due process rights.[3] The Court rejected Falcon’s contention that eliminating the statute of limitations created “special hardships” because Falcon did not have a defense under the six-year statute of limitations, and even if he did “congressional repeal of a statute of limitations does not violate the due process clause.”[4] Falcon himself acknowledged that no court has found that the repeal of limitations constitutes any hardship. The Court further reasons that even if Falcon did have a valid defense, the Court does not find that repealing a statue of limitations is a violation of due process.
The Ninth Circuit Court of Appeals judgment in Falcon impacts both the federal and private loan industry. Federal loans are perceived to be a safer option than private loans. Generally federal loans, such as Stafford Loans, have lower interest rates and give students an opportunity to find a job before being expected to make loan payments. There is also the opportunity to have federal loans forgiven after a certain period of time. The decision of Falcon and the cases it cites magnifies a disadvantage to taking out federal loans instead of private loans. There is still a statute of limitations for private loan debt collection and unless a creditor decides to sue within the limitation period, a student debtor does not have to pay the remaining balance. The policy argument behind the Falcon decision seems to be that it would be economically inefficient to allow students to default on their student loans and not face the consequences of paying the amount owed. The difference in the statute of limitations between federal and private loans can potentially impact the number of students willing to take out federal loans. With the abundance of information about paying student loan debt and recommending students default on their loan payments; it is possible that more students will seek out private loans and take a chance by defaulting.
[1] U.S. v. Falcon, (9th Cir. 2015).
[2] Id.
[3] Id.
[4] Id.
