Great article by Steve Rhode: "Trump Department of Education Operating Beyond Logic on FFEL Collection Fee Change"

This excellent essay by Steve Rhode appeared earlier on the Personal Finance Syndication Network, PFSyncom and on Mr. Rhode's web site titled Get Out of Debt Guy.  contains a variety of good advice and information about all manner of consumer debt problems, including student loans. You can learn more about Steve Rodes here.

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A couple of days ago I wrote about the Trump Department of Education under Secretary Betsy DeVos who told student loan guaranty agencies with FFEL federal student loans to disregard the guidance provided by the Obama administration regarding defaults.

That specific 2015 guidance said student loan debtors who defaulted had up to 60 days after default to enter into a satisfactory repayment plan or rehabilitation to avoid up to 16 percent collection fees being added to their balance on day one of default. The logic was that debtors who entered such repayment plans were not going to incur collection fees that warranted adding 16 percent of the student loan balance. Plus there is underlying guidance to support that position.

In a mind blowing twist, the company who was at the heart of the underlying court case who brought this issue to light, USA Funds who is now Great Lake Higher Education, said that even though the Trump administration rolled back the inability to charge the 16 percent collection fee on day one, they are not going to do it.

Great Lakes said, “Since the U.S. Department of Education issued a Dear Colleague Letter on July 10, 2015, our guarantors have not assessed collection fees on borrowers who entered into rehabilitation agreements within 60 days of default on or after July 10, 2015. Notwithstanding the Education Department’s March 16, 2017, decision, prompted by a request from a federal judge, to withdraw that Dear Colleague Letter, the Great Lakes Affiliated Group Guaranty Agencies will continue their practice of not assessing collection costs on borrowers who agree to rehabilitate their loans within 60 days of default.” – Source

So did the DeVos Department of Education even talk to Great Lakes before falling face first into this? Logically you’d assume they didn’t since Great Lakes obviously did not want to reverse course on this.

My favorite quote on this matter came from Danielle Douglas-Gabriel with the Washington Post who said, “In light of the Education Department’s recent action, USA Funds is seeking to dismiss its lawsuit against the agency.” So not only is the collection company at the heart of this issue not going to charge the collection fee but they are dismissing the lawsuit as well.

So what was the purpose at all for the Department of Education to reverse course on this? None I can see. Let me know what you think in the comments below.

Steve Rhode

Get Out of Debt Guy – Twitter, G+, Facebook


This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.

Dead in the Water: Many students who default on their loans will be sucked into a financial abyss with no means of saving themselves (Reflections on Bible v. United Student Aid Funds, Inc.)

Saving Private Ryan, directed by Steven Spielberg, realistically depicts American soldiers landing in Normandy on D Day, June 6, 1941. As the film accurately represented, many soldiers were killed as they left their landing craft, cut down by machine guns or artillery fire before they ever set foot on the beaches.

Something similar happens to people who default on their student loans. From the moment their student loans go into default, they are dead in the water.

Bible v. United Student Aid Funds, Inc. illustrates my point. Bryana Bible borrowed $18,000 to finance her college studies. She defaulted in 2012, but she promptly agreed to a rehabilitation agreement that allowed her to make reduced monthly payments of only $50 a month. The interest rate on her rehabilitated loan was set at 6.8 percent.

Although Bible faithfully abided by the terms of the rehabilitation agreement, a loan guarantee agency assessed $4,547.44 in "collection costs" against her, increasing her total indebtedness to more than $22,500. When Bible began making $50 monthly loan payments, the guarantee agency applied the payments to the collection costs, not the loan's principal.

In short, Bryana Bible was dead in the water. It would take her more than seven years just to pay off the collection costs on her debt. In the meantime, her loan balance would be accruing interest at the rate of 6.8 percent!

Bible sued the guarantee agency for fraud and racketeering, alleging she had been told that costs against her were zero.  Last August, the Seventh Circuit Court of Appeals ruled that she has a valid cause of action.

The Seventh Circuit's decision is quite long--57 pages including a concurring opinion and a dissent.  But it is not necessary to read the court's lengthy legal analysis to understand what happens to people who default on their student loans, even briefly.

People who default on their loans can get slapped with collection fees amounting to 25 percent of their loan balance, and they can be put in repayment plans that cause their loan balances to go up because the payments aren't being applied to the principal of their loans.

Once student-loan debtors fall into the clutches of the loan guarantee agencies, most of them can never get free.  Collection costs, accrued interest and various fees get added to their loan balances, and their loan balances go up--not down.

That's why we see distressed student-loan debtors stumbling into the bankruptcy courts owing two or three times the amount they borrowed. And who do they meet when they get to bankruptcy court? Attorneys for the loan guarantee agencies, who argue stridently that these poor souls are not entitled to bankruptcy relief.

Bryana Bible's story would be a shocking even if her circumstances were unique. But there are millions of Americans who are unable to pay off their student loans, and most of them are seeing their loan balances go up with each passing month.

Whether it intended to do so or not, Congress created a federal student loan program that benefits the finance industry and pushes millions of student loan debtors into a financial abyss from which there is no escape. The program has destroyed higher education as a moral enterprise and created a modern-day class of sharecroppers who will be indebted to the government for their entire lives.

It will take courage to fix this problem, but we can't look for courage from Congress or from our higher education leaders. I am convinced the only way to bring down this putrid, sleazy flim-flam game is for distressed student-loan debtors to march into bankruptcy court--with or without lawyers--and cry out for justice.

References

Bible v. United Student Aid Funds, Inc., 799 F.3d 633 (7th Cir. 2015).