Education Department rescinds rule that stopped aggressive student debt collectors

A rule protecting student loan holders has been rescinded.
A rule protecting student loan holders has been rescinded.

The Department of Education has rolled back a 2015 rule that prevented student-debt collection of large fees from defaulted borrowers who quickly begin paying again.

In a statement Thursday, the department said the Obama administration rule would have benefited from public comment before it was put in place. It applied to Federal Family Education Loans and prevented guaranty agencies that collect on federally-backed student loans from borrowers who have started repaying or worked out a payment plan.

Agencies want the ability to charge late fees to students who have defaulted, but the Obama administration argued they shouldn’t be able to do so if the student has committed to start paying again. United Student Aid Funds, a guaranty agency, spent $90,000 in the first half of 2016 lobbying against the rule, claiming that the Higher Education Act allows the imposition of such fees. The previous year, an appeals court ruled against USA Funds when it came to collection of the fees.

At issue was a Minnesota woman who was charged $4,547 in fees for defaulting on $18,000 in student loans. She argued that because she had agreed to resume paying off her debt, USA Funds shouldn’t be allowed its 16 percent collection fee. Earlier this year, the company agreed to pay $23 million to settle a class action lawsuit on its practices, although it did not admit to wrongdoing.

After nine months of nonpayment, student loans default. The number of people defaulting hit an all-time high in 2016, with 8 million people abandoning repayment on loans exceeding $137 billion. More than 1 million people defaulted for the first time last year.

The Department of Education said the rule would not be reinstated without a period of public comments. In the meantime, guaranty agencies are free to resume collecting the fees.

FFEL are no longer used because the Education Department now loans directly to students, so anyone who has taken out federal student loans since 2010 is not impacted by the rule change.