Days after a report on federal student loans revealed a double-digit rise in defaults, President Trump's administration revoked federal guidance Thursday that barred student debt collectors from charging high fees on past-due loans.
The Education Department is ordering guarantee agencies that collect on defaulted debt to disregard a memo former President Barack Obama's administration issued on the old bank-based federal lending program, known as the Federal Family Education Loan (FFEL) Program. That memo forbid the agencies from charging up to 16 percent of the principal and accrued interest owed on the loans, if the borrower entered the government's loan rehabilitation program within 60 days of default.
The Obama administration issued the memo after a circuit court of appeals asked for guidance in a case against United Student Aid Funds (USA Funds) challenging the assessment of collection costs. Bryana Bible took the company to court after being charged $4,547 in collection costs on a loan she defaulted on in 2012. Though she had signed a "rehabilitation agreement" with USA Funds to set a reduced payment schedule to resolve her debt, the company assessed the fees.
Education officials sided with Bible, prompting USA Funds to sue the department in 2015. Earlier this year, the company agreed to pay $23 million to settle a class-action lawsuit born out of the Bible case, though it did not admit any wrongdoing.
The two-page "Dear colleague" letter from the Trump administration walks back the department's previous stance on the grounds that there should have been public input on the issue.
"The department will not require compliance with the interpretations set forth" in the previous memo "without providing prior notice and an opportunity for public comment on the issues," the letter said.
The action does not affect any borrowers whose loans are held by the Education Department, according to the department. It could, however, impact nearly 7 million people with $162 billion in FFEL loans held by guarantee agencies.
Nearly half of the total outstanding student debt in default comes from the FFEL program. There has been a fairly steady increase in the total amount of past-due debt in the program, even as the number of borrowers has declined, suggesting that interest charges and other fees are being tacked on to balances.
On Monday, Sen. Elizabeth Warren, D-Mass., and Rep. Suzanne Bonamici, D-Ore., sent a letter urging the Education Department to uphold the Obama administration's guidance on the collection fees, which they said "results in an unnecessary financial burden on vulnerable borrowers."
"Congress gave borrowers in default on their federal student loans the one-time opportunity to rehabilitate their loans out of default and re-enter repayment," the letter said. "It is inconsistent with the goal of rehabilitation to return borrowers to repayment with such large fees added."
The withdrawal of the Obama administration memo arrives the same week as a report from the Consumer Federation of America (CFA) showing that millions of people had not made a payment on $137 billion in federal student loans for at least nine months in 2016, a 14 percent increase in defaults from a year earlier. Though the number of borrowers defaulting for the first time in the direct loan program slowed last year, tens of thousands of people are defaulting for at least a second time.
"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, a senior fellow at CFA and a former student loan ombudsman at the Consumer Financial Protection Bureau. "With more than 3,000 Americans defaulting on a student loan every day, this just adds insult to injury."