Student Loan Debtors Lose Protection from “Overzealous” Collectors


If you default on your student loans for a brief period but begin repaying as soon as you can, are there protections in place to prevent debt collectors from charging you substantial fees? According to a recent article in Time Magazine, such protections used to exist, but the U.S. Department of Education recently rescinded that rule, which “prohibited student loan guaranty agencies from collecting jumbo fees from defaulted borrowers who quickly resume paying.” In other words, student loan borrowers already are being impacted by the current administration’s position on consumer protection.
What else should you know about the U.S. Department of Education’s current position on student borrowers and student loan debt?
How the Rules Can Change Under the Current Administration
What was the Obama-era rule that has been rescinded with regard to student loan borrowers and brief periods of default? As the article explains, the original rule took effect in July 2015, and it prevent guaranty agencies (also known as the “bodies that administer federal loans made before 2010”) from collecting fees from borrowers who default by respond to default notices within 60 days and both agree to and honor a repayment plan. To be clear, the rule was aimed at preventing student loan borrowers from accruing additional fees as a result of a temporary period of default from which the borrower recovered.
The loans that were subject to this rule were those from the Federal Family Education Loan (FFEL) Program. In 2010, that program was phased out, and the U.S. Department of Education began lending directly to student borrowers. As such, the rule did not apply to more recent borrowers who borrowed from the federal government and then defaulted.
However, according to the current U.S. Department of Education, the July 2015 rules should have undergone a public comment period. As such, “the department won’t require agencies to comply with the rule without an opportunity for public comment.” However, it is not yet clear whether the U.S. Department of Education plans to “present the rule for public comment.” If the Department does not seek public comment, it seems likely that the rule will not be put into place again—at least for now.
Why is Defaulting on a Student Loan Such a Big Issue?
Why was this rule so significant, and what does its rollback mean in practice? As the article clarifies, “about 8 million borrowers have defaulted on $137 billion in education debts.” Default begins after a borrower has missed nine months of payment. According to Rohit Chopra, a fellow at the Consumer Federation of America, rolling back the Obama-era rule could prove devastating. He emphasized that rescinding the rule could “exacerbate the tidal wave of defaults” that are likely to be coming. He explained, “with more than 3,000 Americans defaulting on a student loan every day, this just adds insult to injury.”
How costly is defaulting on FFEL loans? The rule actually arose in connection with a specific borrower’s lawsuit related to a $4,500 fee after she defaulted on student loans totaling $18,000. To put that figure another way, the guaranty agency charged 16% even though the borrower contacted the agency and agreed to a repayment plan.
Contact an Oak Park Consumer Protection Lawyer
We will need to wait and see how this rollback plays out. In the meantime, if you have questions about managing student loan debt or other consumer debts, an experienced consumer protection lawyer in Oak Park can help. Contact the Emerson Law Firm today.
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