LEGAL
Insights & Trends
On March 16, the Department of Education issued a memorandum canceling an Obama-era ban on the collection of fees against borrowers who defaulted on their student loans.
The ban, originally imposed in July of 2015, prevented guarantee agencies that collected debt on the Federal Family Education Loan (FFEL) Program from charging collections fees to borrowers who defaulted on their student loan payments, so long as the borrower entered the government’s loan repayment agreement within 60 days of default, and remained current on their payments in the program.
Guarantors often assessed such fines in amounts of up to 18.5% (since revised down to 16%) of the principal and accrued interest owed on loans.
Creation of the ban
The history of the ban starts in 2012, with a FFEL borrower named Bryana Bible. Bible defaulted on her student loans, but then immediately entered into a repayment plan, which she successfully maintained.
However, her loan’s servicer, USA Funds, still imposed fees on Bible of 18.5% of the principal and interest on her loan – which amounted to $4,547.44 in total.
Bible responded by filing a class action lawsuit against the servicer, alleging fraud and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO).
The district court dismissed Bible’s lawsuit for failing to state a claim, and Bible appealed.
The Seventh Circuit Court of Appeals then requested that the Department of Education submit a brief explaining its position on how USA Funds’ practices comported with the department’s regulations.
The department’s brief largely agreed with Bible’s interpretation – specifically, that loan servicers such as USA Funds were prohibited from imposing collection fees on a first-time borrower in default, like Bible, who immediately agreed to and complied with a repayment agreement.
Seventh Circuit accepted the department’s interpretation, and reversed and remanded the lower court’s ruling. USA Funds appealed to both the full Seventh Circuit and the U.S. Supreme Court, but both were denied. The case was eventually certified as a class action and settled this past January for $23 million.
Prior to the Seventh Circuit even issuing its opinion in the matter, the DOE issued guidance to FFEL debt collectors mirroring the statutory interpretations presented in its brief, thereby creating the rule which was just rescinded.
FFEL servicers’ response
The DOE’s March 16 memorandum was met with outcry from congressional Democrats and consumer advocates, but not quite the celebration from FFEL servicers that some may have expected.
That is, all current servicers announced within days of the memorandum’s release that they would not charge the fee, regardless of whether they were now allowed to do so by the DOE.
This attitude shift is likely largely attributable to the scale of the public backlash against the memorandum, with the servicers attempting to distance themselves from the DOE’s stance to avoid any associated negative publicity. Does that mean that as soon as the attention on the issue dies down, servicers will shift again?
Unlikely. In the grand scheme of things, the number of debtors who default on FFEL payments, but then enter and maintain a repayment agreement within 60 days are relatively few. And since the FFEL program was retired in 2010, the number of debtors with that type of loan are shrinking with each passing year.
As such, it doesn’t seem worth the risk of negative publicity to collect additional fees from such a small contingent of borrowers.
Even if student loan servicers aren’t going to directly avail themselves of any benefit offered by this one specific policy change, they are certainly in an advantageous position.
After all, it’s only months into the new administration’s tenure, and many agencies have already altered course on policy dramatically.
Servicers can likely rest assured, then, that they need not worry about unfavorable regulatory changes from the executive branch – at least not for the next three and a half years or so.
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