The Trump Administration is rolling back an Obama initiative that gave some breathing room to consumers who fall behind on student loan repayments.
In its first major policy decision on student loan issues, the U.S. Department of Education is giving lenders the right to charge a 16% fee to borrowers who enter a loan rehabilitation program within 60 days after defaulting on their debt.
Consumer advocates say the move will do nothing to address a wave of defaults.
“The Administration’s first move on the student loan default crisis will do nothing to stop the tidal wave of defaults that is sweeping across the nation,” said Rohit Chopra, Senior Fellow at the Consumer Federation of America and the former Student Loan Ombudsman at the Consumer Financial Protection Bureau. “With more than 3,000 Americans defaulting on a student loan every day, this just adds insult to injury.”
The action applies only to borrowers who took out loans from banks and other institutions, not Federal Direct Loans. It potentially affects about 7 million people who owe approximately $162 billion.
Sen. Elizabeth Warren (D-Mass.) and Rep. Suzanne Bonamici (D-Ore.) protested the action, saying the 16% fee "is enormous and results in an unnecessary financial burden on vulnerable borrowers."
"Congress gave borrowers who default on their federal student loans the one-time opportunity to rehabilitate their loans out of default and re-enter repayment. It is inconsistent with the goal of rehabilitation to return borrowers to repayment with such large fees added," they said in a letter to Education Secretary Betsy DeVos.
The case grows out of a lawsuit against United Student Aid Funds (USA Funds) that challenged the collection costs. In that case, borrower Bryana Bible was charged $4,547 in collection costs after defaulting on a student loan in 2012. The company assessed the fees even though she had signed a rehabilitation agreement that set a reduced payment schedule.
Education Department officials sided with Bible and USA Funds sued the department in 2015. USA Funds later agreed to pay $23 million to settle a class-action lawsuit that grew out of the Bible case, although it did not admit any wrongdoing.
Last week, the Consumer Federation of America released an analysis that showed that 1.1 million Americans defaulted on a federal student loan in 2016. Americans are now in default on $137 billion in federal student loans.
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