Federal Appeals Court restores Trump-era ban on student loan collection fees.
Rule Reinstated to Protect Borrowers
A month before student loan payments are set to resume, a federal appeals court has reinstated a rule that will provide relief to defaulted borrowers. The rule, finalized by the Trump administration in 2019, prohibits student loan guaranty agencies from charging collection fees from borrowers who quickly resume paying.
The rule specifically applies to debt from the Federal Family Education Loan (FFEL) program, which was discontinued during the 2009–2010 academic year. Guaranty agencies administering federally backed student loans made before 2010 will no longer be able to recover “collection costs” from borrowers who defaulted but took steps to repay or rehabilitate their loans in a timely manner.
The FFEL program has been replaced with Direct Loans, so the rule doesn’t affect those who have taken out loans in the past decade. However, Ascendium Education Solutions, one of the largest guarantors, sued in 2019 to reserve the right to impose charges on defaulted borrowers. They argued that the rule is unlawful because it restricts guaranty agencies from recouping costs based on when they are incurred, rather than whether they are reasonable.
Appeals Court Upholds Rule
In a recent decision, the U.S. Court of Appeals for the District of Columbia Circuit overturned the 2022 ruling and upheld the Trump-era rule. The panel of three judges ruled that the rule is consistent with the federal education law.
Circuit Judge Florence Pan, an appointee of President Joe Biden, wrote in the court’s opinion, “The Act permits guarantors to charge borrowers only for ‘reasonable collection costs,’ and the Department permissibly implemented that directive by ensuring that borrowers who create little or no collections work for a guarantor are not charged thousands of dollars in fees.”
Circuit Judge Reed Walker, an appointee of President Donald Trump, wrote in a separate concurring opinion that the Education Department acted “reasonably” within its rule-making authority and no legal precedent is needed to justify the rule.
This ruling comes as the federal government is scheduled to resume collecting student loan payments. Starting on Sept. 1, interest on federally held student loans will begin accruing again after being suspended since March 2020. However, payments on those loans won’t come due for at least another month. The Education Department will notify borrowers ”well before payments restart.”
Support for Borrowers
In June, President Joe Biden announced a plan to establish a year-long “on-ramp” repayment program for those who may struggle with payments when they resume this fall. During this period, the Education Department will not report borrowers to collection agencies or credit bureaus for late, missed, or partial payments, providing some relief to borrowers.
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