                             In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 05-1102
JOSEPH M. BLACK, JR., Trustee,
                                             Plaintiff-Appellant,
                                v.

EDUCATIONAL CREDIT MANAGEMENT CORPORATION and
MARGARET SPELLINGS, Secretary of Education,
                                          Defendants-Appellees.
                          ____________
            Appeal from the United States District Court
     for the Southern District of Indiana, New Albany Division.
       No. NA4:00-241-C-B/S—Sarah Evans Barker, Judge.
                          ____________
 ARGUED SEPTEMBER 19, 2005—DECIDED AUGUST 16, 2006
                   ____________


  Before RIPPLE, WOOD, and WILLIAMS, Circuit Judges.
  WOOD, Circuit Judge. The central issue in this case
is whether a regulation promulgated by the Secretary of
Education that allows the assessment of collection costs
on defaulted student loans to be done on a formulaic basis
was a permissible implementation of the governing
statute, 20 U.S.C. § 1091a. The district court upheld the
regulation, 34 C.F.R. § 682.410(b)(2), over the objection of
a bankruptcy trustee, and accordingly allowed the claim
for collection costs computed according to the regulation.
The trustee appeals. We agree with the district court that
the regulation was a permissible one, and we therefore
affirm.
2                                               No. 05-1102

                             I
   In 1987, North Shore Savings, a private financial in-
stitution, issued two Federal Family Education Loan
Program (FFELP) loans, totaling $2,000 and $2,625, to
David Barnes for truck driving school. Two years later,
Barnes defaulted on the repayment of both loans. (At the
time Barnes’s loans were issued, a borrower was in “de-
fault” if the borrower failed to keep up with her monthly
payments for 180 days; currently the time period for
default is 270 days. See 20 U.S.C. § 1085(l)(1)). Under
FFELP, the federal government subsidizes student loans
issued by private financial institutions and guaranteed
by state or private non-profit agencies and reinsures
these loans for losses, such as those caused by a borrower’s
default. When Barnes defaulted, North Shore Savings
filed a claim against the original guarantor of Barnes’s
student loans—the Great Lakes Higher Education Corpora-
tion (Great Lakes). Great Lakes paid the claim, took an
assignment of Barnes’s student loans, and was subse-
quently reimbursed by the United States Department of
Education (the Department).
  For approximately six years, Great Lakes unsuccessfully
attempted to recover Barnes’s student loan debt. In 1995,
reporting that it was unable to collect the loan, Great Lakes
assigned Barnes’s student loans to the Department. The
Department made further futile attempts at collection until
November 15, 1999, when Barnes, along with his wife
Nancy, filed for bankruptcy under Chapter 13 of the
Bankruptcy Code.
  On March 8, 2000, about four months after Barnes and
his wife filed their Chapter 13 petition, the Department
assigned Barnes’s student loans to the Educational Credit
Management Corporation (ECMC), a non-profit corpora-
tion that acts as a guarantee agency and occasionally
handles the defaulted FFELP loans of debtors who file
No. 05-1102                                                3

a petition for relief under Chapter 13. Shortly after this
assignment, ECMC filed an unsecured proof of claim in
Barnes’s bankruptcy proceeding for $9,108.01, which
represented $7,714.88 in principal and interest on Barnes’s
two defaulted student loans and $1,393.13 in collection
costs. The collection costs were approximately 18.06% of
the $7,714.88 total of the principal and interest Barnes
owed by then. (The district court indicated that collec-
tion costs were $1,394.08 as opposed to the $1,393.13
ECMC set forth in its proof of claim. Although nothing
turns on the 95 cent difference, the district court should
make this correction after it receives our mandate.) ECMC
arrived at this figure by using the methodology pre-
scribed in 34 C.F.R. §§ 6682.410(b)(2) and 30.60(c), which
allows the use of a flat “make whole” rate, in lieu of actual
collection costs in the particular case.
  On April 17, 2000, Joseph Black, the Chapter 13 trustee,
objected to ECMC’s proof of claim in bankruptcy court.
Although he did not dispute ECMC’s claim for the principal
and interest on the defaulted student loans, he argued that
the assessment of collection costs calculated as a flat-
rate percentage of Barnes’s loan balance, as opposed to
the actual costs ECMC incurred while attempting to col-
lect Barnes’s loan, was unreasonable and should not be
allowed by the bankruptcy court. The flat rate was espe-
cially inappropriate, Black argued, because ECMC received
the assignment of Barnes’s loans four months after he filed
his Chapter 13 petition and, thus it had made no pre-
petition collection efforts. In its response to the trustee’s
objection, ECMC defended both the accuracy of its calcula-
tions and its right to use the method set forth in the
Higher Education Act (HEA), 20 U.S.C. § 1091a(b)(1) and
its implementing regulation, 34 C.F.R. § 682.410(b)(2).
Black replied that the regulation itself was “arbitrary,
capricious, and manifestly contrary” to the HEA and thus
could not be used.
4                                                No. 05-1102

   On November 27, 2000, ECMC moved to withdraw
reference from bankruptcy court, in accordance with 28
U.S.C. § 157(d), arguing that resolution of Barnes’s objec-
tion to the proof of claim required consideration of federal
statutes and regulations outside of the Bankruptcy Code.
Although the district court initially denied ECMC’s motion,
it later took this step, reasoning that the issues Black had
raised “require[d] the interpretation, as opposed to mere
application, of the non-title 11 statute.” Matter of Vicars
Ins. Agency, Inc., 96 F.3d 949, 954 (7th Cir. 1996). Shortly
thereafter, the Secretary of Education intervened in the
litigation to defend the regulation. The district
court rejected Black’s challenge and upheld the legality
of 34 C.F.R. § 682.410(b)(2), concluding that the assessment
of collection costs as a flat-rate percentage for borrowers in
default was not arbitrary or manifestly contrary to the
statute, which permits guaranty agencies to charge “reason-
able collection costs.” See 20 U.S.C. § 1091a(b)(1).


                             II
  The Higher Education Act, 20 U.S.C. §§ 1071 et seq.,
established the federal Guaranteed Student Loan Program
in the 1960s. Out of concern for the significant financial
problems that defaulted student loans pose for the fisc,
Congress enacted the Higher Education Amendments in
1986, which include a provision allowing guarantors to
assess collection costs against borrowers in default. Specifi-
cally, the statute provides that “a borrower who
has defaulted on a loan . . . shall be required to pay . . .
reasonable collection costs.” 20 U.S.C. § 1091a(b)(1). The
statute has nothing further to say about the meaning of
“reasonable collection costs.” Instead, Congress left it up to
the Secretary to interpret that term through regulations.
See Chevron, U.S.A., Inc. v. Nat’l Res. Def. Council, Inc.,
467 U.S. 837, 843-44 (1984) (“If Congress has explicitly
No. 05-1102                                                5

left a gap for the agency to fill, there is an express dele-
gation of authority to the agency to elucidate a specific
provision of the statute by regulation.”). As the Supreme
Court recently reiterated, “[d]eference in accordance
with Chevron . . . is warranted only ‘when it appears that
Congress delegated authority to the agency generally to
make rules carrying the force of law, and that the agency
interpretation claiming deference was promulgated in the
exercise of that authority.’ United States v. Mead Corp., 533
U.S. 218, 226-27 (2001). Otherwise, the interpretation is
‘entitled to respect’ only to the extent it has the ‘power to
persuade.’ Skidmore v. Swift & Co., 323 U.S. 134, 140
(1944).” Gonzales v. Oregon, 126 S.Ct. 904, 914-15 (2006).
  Courts defer to legislative regulations like these unless
they are “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with [the] law.” 5 U.S.C.
§ 706(2)(A). This is a narrow standard of review, under
which our task is only to determine whether the agency’s
action “was based on a consideration of the relevant factors
and whether there has been a clear error of judgment.”
Head Start Family Educ. Program, Inc. v. Coop. Educ. Serv.
Agency 11, 46 F.3d 629, 633 (7th Cir. 1995) (quoting Motor
Vehicle Mfrs. Ass’n of the United States, Inc. v. State Farm
Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). If the agency
“articulate[s] grounds indicating a rational connection
between the facts and the agency’s action, then our inquiry
is at an end.” Id.
  In response to this delegation of authority, the Secretary
issued 34 C.F.R. § 682.410, which establishes the basic
rules for the assessment of collection costs against borrow-
ers who have defaulted on their student loans. This regula-
tion begins by providing that a “guaranty agency shall
charge a borrower an amount equal to reasonable costs
incurred by the agency in collecting a loan on which the
agency has paid a default or bankruptcy claim.” 34 C.F.R.
§ 682.410(b)(2). “These costs may include, but are not
6                                                No. 05-1102

limited to, all attorney’s fees, collection agency charges, and
court costs.” Id. It then goes on to adopt a mathematical
formula (the details of which are not important in this
appeal) to determine the precise amount a guarantor may
charge a borrower for collection costs. See 34 C.F.R. § 30.60.
The key point for our purposes is that the Secretary allows
guaranty agencies to charge borrowers a flat-rate percent-
age for collection costs that takes into account the total
costs associated with the agency’s entire defaulted student
loan portfolio, as opposed to requiring the agency to track
the individual charges associated with the collection of a
particular borrower’s account. The total collection costs for
any borrower may not exceed the amount the same bor-
rower would be charged for the cost of collection if the loan
were held by the Department (which, at the time of this
litigation, was a flat rate of 25% of the outstanding princi-
pal and interest, see 61 Fed. Reg. 47398-01 (1996)). Based
upon ECMC’s total collection expenses for 2000 (the year in
which ECMC filed its proof of claim in Barnes’s bankruptcy
case), the formula yielded a flat rate of 18.06%. There is no
dispute in this case that ECMC accurately calculated this
rate using the formula in 34 C.F.R. § 30.60.
  Black argues that 34 C.F.R. § 682.410(b)(2) is arbitrary,
capricious, and manifestly contrary to the HEA because
it allows guarantors to charge borrowers collection costs
that take into account the agency’s entire cost of collection
for a given year, including the costs associated with those
borrowers who cannot, or will never, repay their loans.
Black urges that it is unfair to make borrowers who seek to
repay their loan obligations responsible for the costs
associated with the real deadbeats who never attempt to
reconcile their accounts. Perhaps he is correct, as a mat-
ter of ultimate morality, but the real world does not operate
this way. The price of merchandise in a store reflects the
fact that some people shoplift; the rates associated with
credit cards reflect the fact that some cardholders never pay
No. 05-1102                                                 7

their bills. In these and countless other instances, the many
who pay end up absorbing the costs for the few who do not.
Black points to no provision in the HEA that requires
guarantors to charge each borrower in default only the
collection costs that the agency spent in attempting to
collect his or her individual debt. Under Black’s view, the
costs of those who successfully evade collection efforts
would ultimately be borne by the taxpayers. Such an
outcome would conflict directly with the Secretary’s inter-
pretation of the HEA as mandating that the borrowers
themselves, not the taxpayers, should bear the reasonable
costs of collecting student loans in default. See 61 Fed. Reg.
60478-01 (1996). This policy strikes us as entirely consis-
tent with the statute; thus, whether the Secretary’s state-
ment qualifies for full Chevron deference or the more
qualified Skidmore respect, we find it well supported.
   Although we could stop here, we note as well that testi-
mony about the practical operation of the system from high-
ranking Department officials also supports the Secretary.
These individuals asserted that tracking the actual collec-
tion costs for individual borrowers would be extremely
costly and at times infeasible. In attempting to collect
student loan debts, guaranty agencies like ECMC have to
send letters, make phone calls to borrowers, and conduct
administrative hearings; in some cases, they must track
down borrowers whose whereabouts are unknown or pursue
litigation. Given the sheer number of borrowers whose
federal loans are in default, it would be difficult and
expensive for both the guaranty agencies and the Depart-
ment to keep track of the individual costs associated with
each borrower’s account. There are a number of overhead
costs that cannot readily be attributed to individual borrow-
ers. Black minimizes these problems, arguing that it would
not have been difficult to calculate the costs ECMC ex-
pended in attempting to collect Barnes’s debt given that it
was assigned Barnes’s account after he filed his Chapter 13
8                                                No. 05-1102

petition. This assumes, however, that ECMC’s costs are the
only ones that are relevant, rather than the accumulated
costs of its predecessors in interest. Moreover, this is an
argument that a great many individual debtors could make.
When considering the Secretary’s entire default loan
portfolio, it seems perfectly reasonable to us that the
Secretary would choose to adopt a regulation that calls for
the assessment of average, as opposed to individual, costs.
Black may have a better method in mind for calculating
collection costs, but we are not at liberty to “substitute
[Black’s or even our] own construction of a statutory
provision for a reasonable interpretation made by the
administrator of an agency.” Chevron, 467 U.S. at 844.
  Similarly, at oral argument Black contended that it would
be unreasonable for ECMC to collect an 18.06% fee for
collection costs in Barnes’s case, again pointing out that it
did not take over Barnes’s loans until after he filed for
bankruptcy. As we have already remarked, however,
Barnes’s loans had been in default for almost a decade prior
to the time he filed his Chapter 13 petition. Barnes should
not be absolved from paying the years of collection costs
associated with his account merely because the Department
transferred his debt to the ECMC after he finally decided to
repay his debts through the bankruptcy process. It is
reasonable for the Secretary to assign the right to recover
collection costs to one entity, rather than trying to distrib-
ute it up the chain, and the last holder of the debt is a
rational one to choose. Compare Ill. Brick Co. v. Illinois, 431
U.S. 720 (1977) (barring indirect purchaser lawsuits in
antitrust actions).
  In the alternative, Black argues that, at the very least,
guaranty agencies should be required to consider separately
the average costs associated with the accounts of the subset
of loans in bankruptcy proceedings. He takes issue with the
fact that in calculating its collection costs, ECMC considers
only the costs associated with defaulted student loans that
No. 05-1102                                                  9

are not in bankruptcy proceedings. According to Black, the
Federal Claims Collection Standards (FCCS) regulation, 4
C.F.R. § 102.13(d)(1999) (which was in effect at the time
Barnes filed his Chapter 13 petition, but has since been
abrogated), provided that in assessing charges to cover the
administrative costs incurred as a result of a delinquent
federal debt, the costs “should be based upon actual costs
incurred or upon cost analyses establishing an average of
actual additional costs incurred by the agency in processing
and handling claims against other debtors in similar stages
of delinquency.” Black takes the position that a Chapter 13
proceeding is a separate “stage of delinquency” and on that
premise argues that this regulation required ECMC to
calculate separately the average costs associated with those
loans in Chapter 13 proceedings.
   Even if this regulation were still in effect, we would defer
to the Secretary’s conclusion that bankruptcy is not a
separate stage of delinquency for purposes of this regula-
tion. In arguing to the contrary, Barnes seems to be confus-
ing the terms “delinquent” and “default.” A loan that is 15
days late would be delinquent, but would be in a different
stage of delinquency than a loan that had not been paid in
270 days (the time period after which a loan is considered
to be in default). We see nothing in this regulation that
imposes an obligation on a guaranty agency to calculate
separately the collection costs associated with loans in
bankruptcy. We also note that the evidence in the record
confirms that the collection costs ECMC incurred pursuing
delinquent loans in bankruptcy proceedings were actually
higher than the costs associated with those loans not in
bankruptcy, because of the legal fees associated with
bankruptcy proceedings. It is therefore not clear to us why
Black wants guaranty agencies like ECMC to calculate
collection costs in a manner that will likely result in higher
collection charges being assessed to borrowers who have
filed for bankruptcy.
10                                              No. 05-1102

   Black’s next point is that ECMC failed to establish a loan
rehabilitation program for Barnes as required under 34
C.F.R. § 682.405, the regulation that implements the HEA’s
default reduction program, see 20 U.S.C. § 1078-6. Pursu-
ant to this regulation, a guaranty agency must have in
place a loan rehabilitation program for all borrowers in
default through which the loan may be purchased by an
eligible lender and removed from default status. See 34
C.F.R. § 682.405(a)(1). A loan in default is considered to
be “rehabilitated” only after the borrower has voluntarily
submitted 12 consecutive monthly payments to the guar-
anty agency and the loan has been sold to the eligible
lender. See id. § 682.405(a)(2). After the loan has been
rehabilitated, the borrower regains all FFELP benefits. See
id. § 682.405(a)(3). Black contends that Barnes’s loans
qualified for rehabilitation because he submitted 12
consecutive payments to the bankruptcy trustee as specified
in his confirmed Chapter 13 plan (to which ECMC did not
file an objection). But ECMC never attempted to sell
Barnes’s loans to an eligible lender. If ECMC had done
so, Black argues, the collection costs that would have been
assessed, if any, would have been limited to those costs
ECMC actually incurred in rehabilitating these loans over
the 12-month period, as opposed to the 18.06% flat rate.
  There are a number of flaws in Black’s argument. First,
as the Secretary points out, in order to take advantage of
the rehabilitation process, the borrower must request
rehabilitation from the guaranty agency. See 34 C.F.R.
§ 682.405(b)(1). The district court found that Barnes never
made such a request, and we have no reason to find clear
error in that finding of fact. Given that Barnes’s student
loans had been in default since 1989, the district court
also found that his rehabilitation opportunities expired long
before the loan was assigned to ECMC.
  It is not clear whether a borrower in default can rehabili-
tate her loans through a Chapter 13 proceeding. On the one
No. 05-1102                                                 11

hand, during oral argument ECMC was reluctant to take
the position that a defaulted loan could never be rehabili-
tated in a Chapter 13 proceeding; on the other hand, it
argued that such an action would be an “unusual scenario”
because some features of Chapter 13 are not entirely
consistent with HEA’s rehabilitation provisions and imple-
menting regulations. For example, a loan is rehabilitated
only upon its sale to an eligible lender. Given that the
applicable regulations require a lender to suspend collection
efforts outside a bankruptcy proceeding and submit a proof
of claim for payment in the bankruptcy court, see 34 C.F.R.
§ 682.402(f)(2)(i); (f)(4), a guaranty agency could sell a loan
owed by a defaulter in a Chapter 13 proceeding only under
the supervision of the bankruptcy court, at least until the
proceeding has been completed. More importantly, even if
Barnes’s student loans could have been rehabilitated
through the Chapter 13 proceeding, Black is incorrect in his
assumption that the collection costs assessed to Barnes
would only have been ECMC’s proportionate share of the
monthly payments under the plan actually necessary to
rehabilitate the loan. Nothing in the HEA prohibits a
guaranty agency from assessing collection costs as a flat-
rate percentage upon rehabilitation. To the contrary, the
statute explicitly provides that “[a] guaranty agency may
charge the borrower and retain collection costs in an
amount not to exceed 18.5 percent of the outstanding
principal and interest at the time of sale of a loan rehabili-
tated.” 20 U.S.C. § 1078-6(a)(1)(C). Thus, even if Barnes’s
loans could have been rehabilitated through his Chapter 13
proceeding, the 18.06% that ECMC charged Barnes for
collection costs falls within the bounds of what is allowed
under the HEA’s loan rehabilitation provisions.
  Finally, at oral argument, Black accused ECMC of fail-
ing to comply with 34 C.F.R. § 682.410(b)(5)(ii), which
details a guaranty agency’s administrative obligations
under the HEA. That regulation requires a guaranty agency
12                                               No. 05-1102

to take a number of steps “before it reports [a borrower’s]
default to a credit bureau or assesses collection costs
against a borrower.” These steps include written notice to
the borrower about the proposed actions, id.
§ 682.410(b)(5)(ii)(A), “[a]n opportunity to inspect and copy
agency records pertaining to the loan obligation,” id.
§ 682.410(b)(5)(ii)(B), “[a]n opportunity for an administra-
tive review of the legal enforceability or past-due status of
the loan obligation,” id. § 682.410(b)(5)(ii)(C), and “[a]n
opportunity to enter into a repayment agreement on terms
satisfactory to the agency,” id. § 682.410(b)(5)(ii)(D). Black
wants to argue that there is no evidence that ECMC (or any
of its predecessors) met any of these requirements. He
neither raised this issue before the district court, however,
nor did he develop it in his initial brief on appeal, and so it
is waived. See, e.g., Hart v. Transit Mgmt. of Racine, Inc.,
426 F.3d 863, 867 (7th Cir. 2005) (per curiam) (“Arguments
that first appear in a reply brief are deemed waived.”).
  Accordingly, the district court’s judgment is AFFIRMED.
No. 05-1102                                         13

A true Copy:
      Teste:

                    ________________________________
                    Clerk of the United States Court of
                      Appeals for the Seventh Circuit




               USCA-02-C-0072—8-16-06
