The Trump administration has made it possible for debt collectors to once again charge hefty fees to some student loan borrowers who miss several payments in a row — even if those borrowers make an effort to get back on track right away.
These fees, which can be as high as 16%, are typically levied against the borrower’s entire outstanding loan balance and accrued interest charges. The so-called “collection charges” are meant to help recoup losses incurred by pursuing unpaid debts.
In a recent letter, the U.S. Department of Education rescinded an Obama-era rule that forbade guaranty agencies — debt collectors charged with recouping unpaid federal student loan debt — from charging defaulted borrowers collection fees if the borrowers began a repayment plan within 60 days of defaulting on their loans. In the new letter, the agency said the previous guidance should have included time for public comment and review before it was issued.
The reversal comes days after the Consumer Federation of America released an analysis of Department of Education data that shows the rate of student loans in default has grown 14% from 2015 to 2016.This certainly isn’t the first Obama-era rule or legislation the new administration has sought to undo, with an Obamacare replacement plan on its way to a vote in the House and plans to unravel regulations meant to crack down on for-profit colleges and universities.
A Department of Education spokesperson declined to comment.
Bad news for 4.2 million borrowers
The changes will impact borrowers who took out federal student loans under the old Federal Family Education Loan (FFEL) Program. The FFEL Program was phased out in 2010 and replaced with the current Direct Loan Program, but millions of borrowers are still paying back FFEL loans issued prior to that change. Those who have loans under the Direct Loan Program will not be impacted by the changes.
As it stands, some 4.2 million FFEL borrowers are currently in default on loans that total $65.6 billion, according to Department of Education data. Loans are considered to be in default after 270 days of nonpayment.
The changes will raise the stakes for borrowers struggling to make payments on their federal student loans, and make it even more important for those borrowers to avoid missed payments.
Fortunately, federal student loan borrowers are eligible for several flexible repayment methods, as well as forbearance and deferment.
An Ongoing Debate
The debate over a servicer’s right to charge borrowers a default fee has gone on for several years.
In 2012, student loan borrower Bryana Bible sued United Student Aid Funds after she was charged more than $4,500 in fees after defaulting on her loans. She started a repayment agreement to resolve the debt within 18 days, but was still charged fees.
The Department of Education sided with Bible and said companies had to give borrowers 60 days after a loan default to start paying up before they are charged fees. The Obama administration backed the Department of Education and issued the letter when the court asked for guidance on the issue.
There is one clear winner with this rule change: debt collectors.
“Rescinding the [previous guidance on collection fees] benefits guarantee agencies at the expense of defaulted borrowers,” says financial aid expert Mark Kantrowitz. He adds the change may increase the cost of collecting defaulted federal student loans, since borrowers will have less incentive to quickly rehabilitate their defaulted student loans.
What Happens If I Default on My Federal Student Loans?
Federal student loans are considered to be in default after a borrower misses payments for 270 days or more.
About 1.1 million federal student loans were in default status in 2016, according to Department of Education data.
The consequences of going to default are severe.
- The entire balance of your loan + interest is immediately due
- You lose eligibility for deferment, forbearance, and flexible repayment plans
- Debt collectors will start calling
- Your credit will suffer
- And … your wages and/or tax refunds could be garnished
Are you missing federal student loan payments?
You’ve got options.
- Contact your loan servicer ASAP
- Find out if you’re eligible for a flexible repayment plan
- Or ask about forbearance
Already in default?
- Ask your loan service about loan rehabilitation
- If you make 9 on-time payments over the course of 10 months, your default status will be lifted
You’ve only got one shot to rehabilitate your federal student loans after going into default. Don’t miss it.