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.