The Department of Education recently advised companies that collect debt on billions of dollars in outstanding federal student loans that they can once again charge a large penalty fee to defaulted borrowers. However, the collectors — even one that is currently suing the government for the right to charge this fee — now say they will not automatically add thousands of dollars in additional debt to loans in default.
Bloomberg reports that all 26 loan companies that collect for the Federal Family Education Loan (FFEL) program have said they will not automatically charge borrowers a higher default fee, even though they totally could.
Last week, the Department of Education advised [PDF] federal student loan debt collectors that they were now allowed to automatically charge borrowers a default fee that is equivalent to 16% of the loan balance.
The guarantors were told to ignore a July 2015 Obama administration guidance [PDF] that restricted fees on the public-private FFEL Program loans. That 2015 directive barred guarantors from charging default penalty fees on borrowers who met the following conditions: They responded to the notice of default within 60 days, entered into a repayment and rehabilitation program, and then abided by that program.
With about 7 million borrowers still owing $162 billion in debt for outstanding FFEL loans, the guarantors would likely see a nice windfall from the higher fees.
However, Bloomberg reports that might not be the case, as all of the guaranty agencies have announced in the last week that they won’t be charging higher fees.
“Many student loan borrowers already have a difficult time managing their loan obligations,” James Patterson, chief executive officer of the Texas guaranty agency, tells Bloomberg. “Adding more fees does not help their situation.”
The decision not to charge higher fees comes as a bit of a surprise, as one guaranty agency — USA Funds — waged a rather public battle against the 2015 directive capping the fees.
In fact, USA Funds sued the Department [PDF], alleging that the guidance was inconsistent with the law, and that then Secretary of Education Arne Duncan sidestepped the required rulemaking process by issuing this rule without seeking public comment.
As we reported last week, that lawsuit is still pending in federal court, but recent filings indicate that the government is actively looking to walk away from the dispute.
USA Funds also faced additional scrutiny because of a family connection to the Department of Education. Taylor Hansen, son of USA Funds CEO Bill Hansen, was a high-ranking adviser to Ed. Secy. Betsy DeVos at the time this new guidance was issued. However, amid concerns about improper influence, Hansen quietly stepped down from government gig after only a few weeks on the job.