The Department of Education has told federal student loan debt collectors that they are to ignore previous guidance that restricted the fees they could charge to borrowers who defaulted on their loans — even if they immediately enter into repayment programs.
Until July 2015, guarantors that collected debts on defaulted loans from the public-private Federal Family Education Loan (FFEL) Program were allowed to charge collections fees equal to as high as 18.5% of what was owed on that loan, resulting in bills for several thousands of additional dollars on top of the original amount.
Then the Dept. of Ed. issued guidance [PDF] forbidding these fees, but only if the borrower responds within 60 days of a final notice, enters into a repayment agreement, and abides by that agreement.
This week, the Department changed course drastically, issuing new guidance [PDF] to guarantors, telling them to disregard the 2015 letter.
These fees are not an issue for loans issued through the federal Direct Loan program; only FFEL.
The FFEL program hasn’t issued new loans since 2010, but as the Washington Post notes, there are approximately 7 million borrowers with $162 billion in debt still outstanding to FFEL.
Additionally, the new guidance comes on the heels of a Consumer Federation of America report finding that 1.1 million Americans defaulted on their federal student loans last year — a figure that doesn’t include the number of FFEL borrowers in default, since those loans are managed by private contractors.
Rohit Chopra, CFA Senior Fellow and former student loan ombudsman with the Consumer Financial Protection Bureau, contends that allowing debt collectors to charge 16% fees “will do nothing to stop the tidal wave of defaults that is sweeping across the nation.”
“With more than 3,000 Americans defaulting on a student loan every day, this just adds insult to injury,” adds Chopra.
How Did We Get Here?
You may have read the above and wondered why the Obama administration got rid of these fees in the first place — and why the Trump administration is so eager to revoke that protection.
Back in 2012, a woman named Bryana Bible defaulted on her FFEL loan, but immediately entered into — and maintained — a repayment program. Despite sticking with that agreement, the collector assigned to the loan, USA Funds, charged Bible fees worth 18.5% of the principal and interest on her loan. In total, she was charged more than $4,500 in collection fees.
Bible sued USA Funds, alleging that the company was violating the Higher Education Act (HEA) by assessing fees that she contended were not allowed. She argued that while the law does allow FFEL guarantors to charge a collection fee (up to 18.5% at that time; since revised to 16%), the law also provides that borrowers who enter into rehabilitation plans in a timely manner do not qualify as collection actions, but as a continuation of repayment on the loan. Thus, according to Bible’s view, she was improperly charged a significant amount of money.
A U.S. District Court dismissed the case, but when Bible appealed to the Seventh Circuit Court of Appeals, the court invited then-Secretary of Education Arne Duncan to file a brief explaining the Department’s view on how well the USA Funds charges meshed with existing regulations.
Secy. Duncan’s brief [PDF] agreed with Bible’s interpretation of the law, concluding that when a borrower responds in a timely manner to a default notice and fulfills their obligations, “the guarantor is not required or permitted to charge collection costs to the borrower.”
This is not based on anything specifically spelled out in Dept. of Education regulations, but in Aug. 2015, a two-judge majority on the Seventh Circuit decided [PDF] to defer to Duncan’s opinion in the matter.
USA Funds’ efforts to have this matter appealed were denied by both the full Seventh Circuit [PDF] and (over the objection of Justice Clarence Thomas) the Supreme Court [PDF]. Bible’s lawsuit was eventually certified as a class action, resulting in a $23 million settlement agreement [PDF] reached just this past January.
Before the Seventh Circuit even issued its ruling in Bible, two things happened. First, in July 2015 the Dept. of Education issued the previously mentioned guidance to debt collectors that they were not to charge these fees for borrowers in Bible’s situation. Then, USA Funds sued the Department [PDF], alleging that the guidance is inconsistent with the law, and that Secy. Duncan sidestepped the required rulemaking process by issuing this rule without seeking public comment.
That lawsuit is still pending in federal court, but recent filings indicate that the government is actively looking to walk away from the dispute.
Family Ties?
The President and CEO of USA Funds is Bill Hansen. That name may not mean much to you, but he was briefly Deputy Secretary of Education under President George W. Bush.
Hansen’s most noteworthy contribution during his tenure is what’s generally referred to as the “Hansen Memo” from Oct. 2002, which announced a change in the agency’s thinking on schools rewarding its employees for large enrollment figures.
The Higher Education Act forbids colleges that received federal funding from providing any “commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments.”
Before the Hansen Memo, the Department’s stance had been that violation of this law could result in suspension or termination of a school’s federal aid. Some colleges were made to return funds to the government after being caught. Hansen’s interpretation softened the government’s position, concluding that in most cases schools should only face fines for breaking this rule.
Critics of the for-profit college industry say that the Hansen Memo helped to open the door to unscrupulous college chains that made student body size a higher priority than educating those students.
This story also involves another Hansen, his son Taylor, who recently joined the Department as an advisor to new Education Secy. Betsy DeVos.
Aside from the fact that the younger Hansen’s employer is being sued by his father’s company, Taylor Hansen (not to be confused with the more famous Taylor Hanson), has also spent his recent years lobbying on behalf of the for-profit college industry.
More precisely, Hansen was a lobbyist for Career Education Colleges and Universities (formerly known as the Association of Private Sector Colleges and Universities), which had unsuccessfully tried to sue the Dept. of Education to stop the so-called “Gainful Employment” rule that would hold colleges accountable for their students’ ultimate ability to earn a living.
While Hansen’s former boss at CECU says Taylor did little in the way of active lobbying at the organization, he nonetheless believes that the for-profit industry will find a friendlier atmosphere under President Trump and Secy. DeVos.
“It’s guaranteed that they will be more friendly,” CECU CEO Steve Gunderson recently told ProPublica. “We have an administration that is happy to talk with us and respond to our questions and comments.”
For-profit college loan borrowers currently account for 33% of all federal student loan defaults (down from 44% only a few years ago) despite only being responsible for about 26% of these loans. USA Funds, as a guarantor of defaulted student loans, may be buoyed by a return to less scrutiny on the for-profit education industry.
We attempted to contact the Department of Education for comment on this potential conflict of interest but were unable to reach anyone at the agency. The telephone line for the Communications office was not accepting voicemails when we called.
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