Days after a report on federal student loans revealed a double-digit rise in defaults, President Trump’s administration revoked federal guidance Thursday that barred student debt collectors from charging high fees on past-due loans.
The Education Department is ordering guarantee agencies that collect on defaulted debt to disregard a memo former President Barack Obama’s administration issued on the old bank-based federal lending program, known as the Federal Family Education Loan (FFEL) Program. That memo forbid the agencies from charging fees for up to 16 percent of the principal and accrued interest owed on the loans, if the borrower entered the government’s loan rehabilitation program within 60 days of default.
The Obama administration issued the memo after a circuit court of appeals asked for guidance in a case against United Student Aid Funds (USA Funds) challenging the assessment of collection costs. Bryana Bible took the company to court after being charged $4,547 in collection costs on a loan she defaulted on in 2012. Though she had signed a “rehabilitation agreement” with USA Funds to set a reduced payment schedule to resolve her debt, the company assessed the fees.
Education officials sided with Bible, prompting USA Funds to sue the department in 2015. Earlier this year, the company agreed to pay $23 million to settle a class-action lawsuit born out of the Bible case, though it did not admit any wrongdoing.
The two-page “Dear colleague” letter from the Trump administration walks back the department’s previous stance on the grounds that there should have been public input on the issue.
“The department will not require compliance with the interpretations set forth” in the previous memo “without providing prior notice and an opportunity for public comment on the issues,” the letter said.
The action does not affect any borrowers whose loans are held by the Education Department, according to the department. It could, however, impact nearly 7 million people with $162 billion in FFEL loans held by guarantee agencies.
Nearly half of the total outstanding student debt in default comes from the FFEL program. There has been a fairly steady increase in the total amount of past-due debt in the program, even as the number of borrowers has declined, suggesting that interest charges and other fees are being tacked on to balances.
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