Trump Administration Reverses Protection for Student Loan Borrowers in Default

student loan borrowers

If you have student loans, a recent roll-back of an Obama-era rule could affect you.

The Office of Postsecondary Education, a part of the Department of Education, reversed a rule protecting some student loan borrowers from collection fees on defaulted loans in a March 16 letter. This does away with an important student loan protection that’s been in place since 2015.

Without this rule, debt collectors are free to charge huge collection fees on defaulted student loan debt — even on defaults that are quickly resolved.

How the rule protected student loan borrowers in default

The former guidance to student loan collection agencies, outlined in the Dept. of Ed.’s “Dear Colleague Letter (DCL) GEN 15-14” issued on July 10, 2015, protected certain borrowers from collection fees.

Currently, if you fail to make a student loan payment for 270 days (9 months), your loan goes into default. In many cases, the servicer will send the defaulted debt to collections. Then the debt is handled by the guaranty agency, a company authorized to collect on student loans.

Guaranty agencies levy collection fees on defaults. These can total 18 to 40 percent of the balance — a hefty fee that significantly adds to the total cost of that debt.

However, under the Obama administration, debt collectors could not assess collection fees on certain defaulted student loans if those defaults were quickly resolved. Additionally, it applied only to Federal Family Education Loan Program (FFELP) Loans (the Department of Education discontinued this loan program in 2010).

Student loan collection agencies charge $15 million per year

In its letter, the Office of Postsecondary Education stated the guideline “would have benefitted from public input on the issues discussed” as the reason for rescinding the guidance.

But removing this protection will cost student loan borrowers millions while benefitting guaranty agencies, especially as student loan defaults are on the rise — up 14 percent in 2016 over the previous year.

For instance, the nation’s biggest guaranty agency, United Student Aid Funds, Inc., made tens of millions off of such fees. That is, before the rule prohibited them from doing so in July 2015. With this roll back, USA Funds can resume collecting fees that add $15 million to their revenue annually, according to Bloomberg.

How to protect yourself

This action is one of the latest moves by the Trump administration to loosen certain financial regulations. President Trump recently signed an executive order aimed at weakening the Dodd-Frank act as well. Critics say these changes are made at the expense of consumers.

To protect yourself in light of these recent changes, buff up your own defenses against debt servicers and collectors. Here are a few things you can do to make sure you’re protected:

  • Make student loan payments on time
  • Review monthly statements carefully to catch errors
  • Make sure repayments are being applied correctly

Consumer-friendly policies are important. They can help you keep up with your student debt, even through hardship. Luckily, there are still many protections in place to help, such as deferment or income-driven repayment.

Stay on top of your debts and continue to be proactive. Even if you hit a rough financial patch, you can avoid student loan default.

Interested in refinancing student loans?

Here are the top 6 lenders of 2018!
LenderRates (APR)Eligible Degrees 
Check out the testimonials and our in-depth reviews!
2.75% - 7.24%Undergrad
& Graduate
Visit SoFi
2.57% - 6.39%Undergrad
& Graduate
Visit Earnest
2.57% - 7.12%Undergrad
& Graduate
Visit CommonBond
2.99% - 6.99%Undergrad
& Graduate
Visit Laurel Road
2.58% - 7.26%Undergrad
& Graduate
Visit Lendkey
2.89% - 8.33%Undergrad
& Graduate
Visit Citizens
Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.