Trump Education Department Now Allows Big Collection Fees on Defaulted College Loans

The new guidance affects loans from lending institutions made before the feds took over the student loan program in July 2010

The burden of student loan debt just got a lot heavier for some borrowers in or near default. The Department of Education under President Donald Trump has rescinded guidance from the Obama administration that barred debt collection agencies from charging high fees to borrowers who had defaulted on Federal Family Education Loan Program (FFELP) loans. They can now charge an additional 16% on the outstanding principal and interest of loans in default.

FFEL loans are college loans from private institutions guaranteed by the federal government, made before June 30, 2010.  After that date, the federal government took over the student loan market from banks, but that, too, could change under the Trump administration.

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“The administration’s first move on the student loan default crisis will do nothing to stop the tidal wave of defaults that is sweeping across the nation,” said Rohit Chopra, senior fellow at the Consumer Federation of America and former student loan ombudsman at the Consumer Financial Protection Bureau, in a statement. “With more than 3,000 Americans defaulting on a student loan every day, this just adds insult to injury.”

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The DOE notice does not address how a borrower in default will be able to afford the additional fees on their loan. Chopra at the Consumer Federation expects many of those borrowers will be subject to wage garnishment, Social Security benefit seizure and tax refund offsets.

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Mark Kantrowitz, publisher and vice president of strategy at Cappex.com, a website that helps students and families research colleges, financial aid and scholarships, tells ThinkAdvisor that the move by the government “harms borrowers” and “benefits guarantee agencies.”

One of those agencies, United Student Aid Funds, sued the Education Department soon after the Obama administration banned the collection fees on defaulted FFEL loans in July 2015. The department stated in its Dear Colleague Letter (DCL) then that a guaranty agency could not charge a defaulted borrower collection costs if that borrower enters into a repayment agreement within 60 days of receiving an initial collection notice, and honors it.

That guidance was issued in the aftermath of a lawsuit from a student loan borrower who was charged $4,500 in collection fees by USA Funds less than three weeks after she had entered into a rehabilitation program to repay a $18,000 loan in default. USA Funds lost that suit and now operates under the name Strada Education Network.

The Trump administration's Education Department, in its DCL guidance reversing the Obama policy, states that the earlier move by the department “would have benefited from public input on the issues discussed.” It is not requesting public comment on its reversal.

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