2025 Student Loan Lawsuits and Challenges

• Earnest Operations LLC agrees to pay $2.5 million and reform lending practices.

• Massachusetts AG alleges AI-driven loan decisions harmed Black, Hispanic, and non-citizen applicants.

• Settlement mandates compliance measures and bans discriminatory algorithmic rules.

Massachusetts Attorney General Andrea Joy Campbell has secured a $2.5 million settlement with Earnest Operations LLC, a Delaware-based student loan company, over allegations that its lending practices — driven by artificial intelligence (AI) — discriminated against marginalized borrowers and violated consumer protection and fair lending laws.

The settlement, filed in Suffolk County Superior Court as an assurance of discontinuance, addresses what the AG’s office described as systemic failures in Earnest’s underwriting process, including the use of AI models that allegedly produced disparate impacts on Black, Hispanic, and non-citizen borrowers.

AI models under scrutiny

According to the Attorney General’s investigation, Earnest used algorithmic models to make critical decisions about loan eligibility, pricing, and terms. However, the company failed to test for discriminatory outcomes and relied on data inputs and training methods that introduced bias — amplifying existing inequities in the lending process.

“Earnest’s failure to comply with consumer protection and fair lending laws, including through its AI models, unfairly put historically marginalized student borrowers at risk of being denied loans or receiving unfavorable loan terms,” AG Campbell said in a statement.

One key point of contention was the company’s use of the federal Cohort Default Rate (CDR) — a statistic reflecting average loan defaults at individual schools — as an input variable in its algorithms. The AG’s office said this disproportionately penalized applicants who attended minority-serving institutions, including historically Black colleges and universities.

Other alleged violations

In addition to algorithmic bias, the AG alleged other unfair practices:

• Use of a “Knockout Rule” to automatically deny loans based on immigration status.

• Arbitrary human assessments that led to inconsistent and opaque decisions.

• Inaccurate adverse action notices that misinformed applicants about credit decisions.

• A lack of internal compliance infrastructure to oversee fair lending risks.

Earnest denied all allegations and maintained that it did not violate state or federal law. The company said it agreed to the settlement solely to resolve the matter without prolonged litigation.

Reforms mandated in settlement

Under the terms of the agreement, Earnest must:

• Pay $2.5 million to the state of Massachusetts.

• Cease use of the Cohort Default Rate and immigration-based Knockout Rule in its loan decision models.

• Establish a robust corporate governance structure to monitor AI use.

• Develop written policies for responsible, legally compliant AI deployment.

• Regularly report compliance metrics to the AG’s office.

The settlement marks one of the first state-level enforcement actions targeting AI-related bias in financial services, setting a precedent for how regulators may respond to emerging technologies that impact consumer rights.

“This case sends a strong message,” Campbell said, “that technology, no matter how advanced, cannot be used as an excuse to sidestep civil rights and consumer protections.”

Key takeaways: 

• Collections on defaulted federal student loans will restart May 5 after five-year pause
• Borrowers in default risk wage garnishment, tax refund seizures, and Social Security offsets
• Officials urge borrowers to explore loan rehabilitation and consolidation options to avoid penalties

The U.S. Department of Education announced Monday that involuntary collections on defaulted federal student loans will resume next month, ending a pandemic-era freeze that began in 2020. The move will affect millions of Americans, with financial consequences ranging from tax refund seizures to garnishment of wages and Social Security benefits.

Defaulted borrowers face consequences

Starting May 5, the government will once again begin collecting on defaulted student loans through mechanisms such as tax refund offsets and Social Security garnishment. Wage garnishments are expected to resume later in the summer. The change marks the final stage in the Biden administration’s phased restart of federal student loan obligations, which resumed general repayments last year.

Approximately 5.3 million borrowers are currently in default, according to the Education Department. That number could climb as more borrowers fall into delinquency amid rising repayment struggles.

Scott Buchanan of the Student Loan Servicing Alliance said the announcement should be a wake-up call: “Borrowers should be working actively with their servicers and pay attention to our outreach to avoid the meaningful consequences of default.”

Understanding default vs. delinquency

A loan becomes delinquent when a payment is late by more than 90 days and defaults after around 270 days of missed payments. Borrowers in default are no longer eligible for income-driven repayment plans, deferment, or federal aid until they resolve their status.

Experts like Betsy Mayotte, founder of the Institute of Student Loan Advisors, stressed the financial toll of default in a Washington Post report: “It can have a really negative impact on your credit score and prevent you from accessing other financial aid in the future.”

How to avoid or escape default

Borrowers concerned about their status are urged to visit studentaid.gov or wait to be contacted by the Federal Student Aid office, which will reach out in the coming weeks.

Two key options to escape default include:

• Loan Consolidation: A quicker fix, though it can add collection costs and doesn’t erase the default mark from your credit.

• Loan Rehabilitation: Requires nine consecutive on-time payments, but once complete, it removes the default from your record—though prior delinquencies remain.

Older, low-income borrowers at risk

Mayotte warned that older borrowers and those living paycheck to paycheck may be hit hardest by resumed collections. “Student debt is not only a young person’s problem,” she said. “And the older that people get, the higher likelihood they have of defaulting.”

She and other advocates urge borrowers not to delay. “There’s a lot of anxiety and shame around default,” Mayotte noted. “But the first step in feeling better will be to reach out and start talking about resolving the default.”