In its first major policy decision on student loan issues, the U.S. Department of Education took action to give agencies collecting on some defaulted student debt the right to charge a 16 percent fee to borrowers who promptly seek to fix their default. The action reverses previous guidance that forbids fees that lead to ballooning borrower costs.
“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. “With more than 3,000 Americans defaulting on a student loan every day, this just adds insult to injury.”
Current guidance forbids the agencies that collect on defaulted debt to tack on large collection fees if the student loan borrower makes – and honors – a repayment arrangement within 60 days of the notice of default. Federal student loans usually enter a default status when borrowers are 270 days late on their payments.
Due to servicing mistakes, many borrowers may be learning about problems with their loan for the first time. These agencies are entitled to “reasonable” collection costs under existing law, but hefty fees were considered inappropriate for borrowers who promptly seek to address their default.
The action applies only to borrowers who took out loans from banks and other institutions, not Federal Direct Loans.
One of these agencies, USA Funds, fought the Education Department for the right to charge large collection fees to these borrowers who quickly make arrangements to get out of default, Chopra said.
Last week, the federation released an analysis showing that 1.1 million Americans defaulted on a federal student loan in 2016. Americans are now in default on $137 billion in federal student loans.