Originally reported by InsideHigherEd, student loan guaranty agency USA Funds (USA) filed suit last week in federal court against the Department of Education (Department) over a letter the Department sent on July 10, 2015 prohibiting agencies from imposing collection fees on borrowers who default on their loans but initiate payment arrangements within 60 days.

USA Funds is a nonprofit “guaranty agency,” which, pursuant to certain loan programs under the Higher Education Act of 1965 (HEA), “guarantees” student loans by private lenders. When borrowers default, USA Funds pays the private lender and assumes the loan, receives reinsurance from the Department of Education (Department) for most of the value of the loan, and then proceeds with collection efforts against the defaulted borrower on behalf of the Department.

The HEA provides that guaranty agencies shall assess reasonable collection costs [editor’s note: these typically range from 15-20% of the value of the loan] to borrowers who default on their student loans, and that guaranty agencies “may” charge such collection costs to all defaulted borrowers up to certain statutory limits, without exception.

USA Funds is claiming that the Department, “interpreting” its HEA regulations, suddenly announced a new rule – and sought to apply it retroactively – that guaranty agencies “may not” assess collection costs to defaulted borrowers in certain circumstances, namely, when a defaulted borrower enters into a rehabilitation agreement within sixty days of notice of default, and complies with that agreement.

They claim that the Department is only now assigning this interpretation to the regulation, which is contrary to the text of the HEA, constitutes improper legislative rulemaking without required notice and comment procedures, constitutes impermissible retroactive rulemaking, and is unlawful, arbitrary, capricious, and irrational. USA also claims the new rule will significantly harm student loan borrowers by discouraging timely loan rehabilitation [because the threat of the penalty upon default would be rendered ineffective].

A little extra background: As explained by the website FinAid, The Health Care and Education Reconciliation Act of 2010 ended the federally-guaranteed student loan program — the Federal Family Education Loan Program (FFELP) — effective June 30, 2010. All new federal education loans since July 1, 2010 have been made through the Direct Loan program. Despite the end of FFELP, the 35 guarantee agencies are still involved in guaranteeing the existing FFELP loan portfolios against default and will continue in this role until the last FFELP loan is paid in full.

insideARM Perspective

In most cases, guarantors handle “early age collections” (first 60 days) in-house. As a result, this case is expected to have a minimal impact on 3rd party collectors. The exception may be American Student Assistance (ASA), which guarantees loans in Massachusetts, which insideARM believes does outsource this stage of collections.

The matter, however, is worth watching as clearly the Department is undergoing a battle to figure out how to reign in the massive portion of its student loan portfolio in default, and as the collection industry waits for the next chapter to be written in the private collection agency contract saga.


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