Student Loan Lawsuits and Challenges

Key takeaways: 

• Collections on defaulted federal student loans will restart May 5 after five-year pause
• Borrowers in default risk wage garnishment, tax refund seizures, and Social Security offsets
• Officials urge borrowers to explore loan rehabilitation and consolidation options to avoid penalties

The U.S. Department of Education announced Monday that involuntary collections on defaulted federal student loans will resume next month, ending a pandemic-era freeze that began in 2020. The move will affect millions of Americans, with financial consequences ranging from tax refund seizures to garnishment of wages and Social Security benefits.

Defaulted borrowers face consequences

Starting May 5, the government will once again begin collecting on defaulted student loans through mechanisms such as tax refund offsets and Social Security garnishment. Wage garnishments are expected to resume later in the summer. The change marks the final stage in the Biden administration’s phased restart of federal student loan obligations, which resumed general repayments last year.

Approximately 5.3 million borrowers are currently in default, according to the Education Department. That number could climb as more borrowers fall into delinquency amid rising repayment struggles.

Scott Buchanan of the Student Loan Servicing Alliance said the announcement should be a wake-up call: “Borrowers should be working actively with their servicers and pay attention to our outreach to avoid the meaningful consequences of default.”

Understanding default vs. delinquency

A loan becomes delinquent when a payment is late by more than 90 days and defaults after around 270 days of missed payments. Borrowers in default are no longer eligible for income-driven repayment plans, deferment, or federal aid until they resolve their status.

Experts like Betsy Mayotte, founder of the Institute of Student Loan Advisors, stressed the financial toll of default in a Washington Post report: “It can have a really negative impact on your credit score and prevent you from accessing other financial aid in the future.”

How to avoid or escape default

Borrowers concerned about their status are urged to visit studentaid.gov or wait to be contacted by the Federal Student Aid office, which will reach out in the coming weeks.

Two key options to escape default include:

• Loan Consolidation: A quicker fix, though it can add collection costs and doesn’t erase the default mark from your credit.

• Loan Rehabilitation: Requires nine consecutive on-time payments, but once complete, it removes the default from your record—though prior delinquencies remain.

Older, low-income borrowers at risk

Mayotte warned that older borrowers and those living paycheck to paycheck may be hit hardest by resumed collections. “Student debt is not only a young person’s problem,” she said. “And the older that people get, the higher likelihood they have of defaulting.”

She and other advocates urge borrowers not to delay. “There’s a lot of anxiety and shame around default,” Mayotte noted. “But the first step in feeling better will be to reach out and start talking about resolving the default.”

The Consumer Financial Protection Bureau (CFPB) has released a special report on illegal activities in the student loan market. The report highlights violations related to student loan refinancing, private lending, servicing, debt collection, and federal loan servicing.

Student loans, which amount to over $1.7 trillion in debt, are a significant financial issue in the U.S. Recently, many borrowers faced challenges as they returned to repayment after the COVID-19 payment pause ended. The CFPB found several illegal practices:

1. Misleading Borrowers About Refinancing: Some lenders misled borrowers about losing federal protections when refinancing federal loans and failed to follow instructions for consolidating loans.
2. Deceptive Private Lenders: Some lenders denied benefits to eligible borrowers and falsely advertised loan benefits, such as autopay discounts and job-related payment suspensions.
3. School Misconduct Claims: Some servicers failed to properly address borrowers’ claims of school misconduct, such as misleading them about their right to challenge loans.
4. Illegal Collection Tactics: Certain contracts allowed schools to withhold academic transcripts or threaten legal actions against students in default.
5. Problems with Federal Loan Servicers: Federal loan servicers failed to provide accurate billing statements and made errors in processing applications for income-driven repayment plans.

The CFPB has directed companies to correct these violations and, when necessary, opened investigations for enforcement. This report is part of ongoing oversight of the student loan market and reflects the CFPB’s effort to protect borrowers from unfair practices.

The Federal Trade Commission has stopped a scam that allegedly deceived student loan borrowers out of millions of dollars by pretending to work with the U.S. Department of Education.

The scheme, run by Nevada-based Superior Servicing, targeted consumers with false promises of loan consolidation, reduced payments, and debt forgiveness, the FTC said.

They collected illegal upfront fees of up to $899 and monthly payments, claiming these payments would go toward student loans. However, borrowers received little or no real help and were left deeper in debt.

The operators allegedly impersonated the Department of Education, advising borrowers to stop paying their actual loan servicers. They falsely claimed to take over loan servicing and promised loan forgiveness after years of payments, which never happened.

The FTC has frozen the defendants’ assets and is seeking to permanently stop their deceptive practices. The agency charged the defendants with violating rules against impersonation, deceptive practices, and illegal advance fees.

The Consumer Financial Protection Bureau (CFPB) took action against Performant Recovery, Inc. today for illegal student loan debt collection practices.

It said Performant delayed borrowers' loan rehabilitation processes, adding unnecessary fees and costing borrowers thousands of dollars. The CFPB ordered the company to pay a $700,000 fine and banned it from collecting or servicing any student loans.

“Performant concocted a scheme to juice their profits by delaying student borrowers their rightful relief,” said CFPB Director Rohit Chopra. “The CFPB is holding Performant accountable for its unlawful debt collection practices that cost borrowers thousands of dollars.”

Performant, a debt collection company, delayed loan rehabilitations intentionally, the CFPB allegeed. Borrowers who acted within 65 days of default could avoid extra fees, but Performant slowed the process to ensure borrowers incurred collection costs, benefiting the company.

Performant used tactics like forcing borrowers to use slower methods, such as mailing forms, to delay the process further.

The CFPB found Performant’s actions caused borrowers to lose financial benefits, like avoiding fees, restoring student aid eligibility, and clearing defaults from credit reports. Performant’s practices were deemed unfair and abusive under federal law.

The order stops Performant from handling student loan debt and requires it to pay a $700,000 penalty to the CFPB’s victims relief fund.

If you’re one of the hundreds of thousands who attended the for-profit University of Phoenix, there may be a gift waiting for you: a big fat student loan forgiveness.

A new crop of University of Phoenix students (UOP) have just been approved for full forgiveness of their federal student loans by the U.S. Department of Education (ED).

If you attended the school anytime between September 21, 2012 and December 31, 2014, and were misled by the school’s claims and submitted a valid application for relief through ED’s Borrower Defense program, there’s a high probability that you’re eligible for the agency’s loan relief. 

ED’s decision is based in part on the FTC’s 2019 court action against the University of Phoenix for using trickery in advertising practices to get students to enroll. At the time, the FTC alleged that UOP tried to attract students by claiming that it had relationships with employers such as Microsoft and could assist students in getting jobs once they got their UOP sheepskin.

The agency said these ads were specifically targeted at people in the military, veterans, and military spouses.

Already submitted a claim? Already got one?

If you’ve already submitted a borrower defense claim, you may be in luck. Just check the status of your application on the borrower defense page under “Manage My Applications” at StudentAid.gov. 

If you haven't submitted one yet, then time’s a-wastin’ so file your claim… now. The agency says that if you’ve already received a refund from the FTC’s settlement, don’t sweat it because you’re still eligible for loan forgiveness through ED’s borrower defense program.

Sweet, huh? The agency just asks that you mention that fact when you apply. Find out more at ftc.gov/UOP.

You’ve probably heard that the Biden administration’s sweeping plan to forgive a portion of government student loans was blocked by the Supreme Court. But it turns out some of the loans will be forgiven.

This week the U.S. Department of Education began the process of discharging 804,000 student loans that meet certain criteria. To qualify, the borrower must have been enrolled in the Department of Education’s income-driven repayment (IDR) plan and have been making payments for at least 20 years.

The White House announced the forgiveness plan in July after the high court ruled the administration’s unilateral move to forgive debt without consulting Congress was unconstitutional.

Under the plan announced last month, the government will write off approximately $39 billion in student loan debt.

“I have long said that college should be a ticket to the middle class – not a burden that weighs down on families for decades,” Biden said as he announced the plan.

Who qualifies?

Borrowers will qualify for forgiveness if they have made payments for 20 or 25 years depending on when a borrower first took out the loans, the type of loan they have, and the income-driven repayment plan they are on.

Eligible borrowers should have received notification of their loan forgiveness by mail. Government officials will not call borrowers, so if someone calls and claims to be able to help you with your loan, it’s a scam.

The Department of Education said qualifiers include people with Direct Loans or Federal Family Education Loans held by the department, including Parent PLUS loans of either type, who have reached the necessary forgiveness threshold as a result of receiving credit toward IDR forgiveness.

Everyone else with a student loan must resume payments by October.

Enough Republicans and Democrats in Congress found enough common ground to pass a debt ceiling bill and avert a U.S. government default.

But as a result, people with student loan debt – whose payments were suspended at the start of the COVID-19 pandemic three years ago – will resume making monthly payments. The resumption of loan payments was one of the many other features contained in the bill.

The bill, which President Biden is expected to sign, calls for the resumption of student loan payments “60 days after June 30, 2023,” which would be Aug. 29. Estimates of total student loan balances vary but investment banking firm Jefferies has reported that about 45 million Americans owe more than $1 trillion, with average monthly payments of $393.

Economists are concerned about what this will mean to the U.S. economy. Payments were suspended in 2020 because it was believed the pandemic would lead to widespread unemployment and severe economic hardship for student loan borrowers.

While unemployment spiked in the first couple of months, the U.S. quickly had a labor shortage and most people who wanted jobs could find one. At the same time, the U.S. government paid out more than $1 trillion in stimulus payments.

Belt-tightening

Student loan borrowers who have grown accustomed to not making those payments will now have to factor them back into their monthly budgets. And the political climate makes Biden’s student loan debt forgiveness proposal appear less likely to prevail.

In fact, the Senate, controlled by Democrats, this week passed a House measure to repeal the administration’s debt forgiveness program. Biden has said he will veto it.

Opponents of debt forgiveness say it is unfair to ask taxpayers who didn't go to college and those who have paid off their student loans to pay for those who still owe.

Even with the veto, the debt forgiveness program is at the mercy of the U.S. Supreme Court, which is set to rule on the measure’s constitutionality. Biden’s executive order would grant 40 million borrowers up to $20,000 in student loan forgiveness.

Since the White House announced its student loan debt forgiveness program, scammers have come out of the woodwork, seeking to convince borrowers they should pay for unnecessary and non-existent services related to loan forgiveness.

Lately, a new scam has emerged that appears to be among the most dangerous that have been reported so far. Instead of randomly targeting people who may or may not have student loans, these scammers have gathered specific information about their intended victims.

Some victims of this scheme have reported the scammer had their name, the date they graduated, their Social Security number, and even their FAFSA (Free Application for Federal Aid) information.

The contact usually comes by phone. A call comes out of the blue from someone who claims to be associated with the Department of Education’s loan forgiveness program. Because they know their victim’s name and have information about them, the caller may have added credibility.

How it works

However, no one from the Department of Education or from any part of the government’s loan forgiveness program cold-calls borrowers.

After gaining credibility with the victim, the caller says the borrower must pay an upfront fee of several hundred dollars, then a monthly fee until the loan forgiveness has been completed. That’s another sign of a scam, since demanding upfront fees for services is illegal.

The scammer also tells the intended victim that their services can result in having as much as $60,000 in student loans wiped clean. Not true. The White House plan allows for forgiveness of up to $10,000 in student loan debt and $20,000 for borrowers who took Pell Grants.

What to do

Student loan borrowers contacted in this manner with these kinds of promises should assume from the start that it is a scam. If there is any doubt, contact StudentAid.gov directly to verify the information.

Never pay a fee to participate in a free government program. A legitimate agency will not ask for a payment, only scammers will. 

Be highly suspicious of phone calls that come out of nowhere. Government agencies, especially, don’t make unsolicited phone calls.

If the caller is aggressive or pushy and warns you will miss out if you don’t act immediately, that’s yet another red flag. The hallmark of a scam is to close the net quickly before the victim has time for rational thought.

While all scams are scary, this one appears to be particularly dangerous. The scammer is targeting specific individuals using sensitive information they have obtained from either a data breach or from the dark web. 

Student loan borrowers should consider changing the passwords to their FAFSA accounts and taking other steps to protect their personal information.