New data released on March 14 by the US Department of Education showed that in 2016, 1.1 million Federal Direct Student Loan borrowers defaulted. The data also shows that a total of $137.4 billion in student loan balances were in default.
Student Loan Collection Fees
Until a couple years ago, collectors of defaulted loans were permitted to charge as high as 18.5% in collection fees. These fees rapidly increased the already-enormous debt that caused the borrowers to go into collections in the first place.
The Obama Administration acted against this in July of 2015, issuing a memo to protect these borrowers. The directive prohibited guarantee agencies—state or private nonprofit agencies that administer the federal guaranteed loan program—from charging these high collection fees.
New President, New Rules
Just a couple days after the reported increase in student loan defaults, President Trump sent a letter telling the lenders to ignore the previous directive, clearing a path for them to charge outrageous fees on the defaulted loans.
While this new guidance will only affect borrowers who took out loans under the Federal Family Education Loan (FFEL), 4.2 million borrowers with FFEL loans were in default as of 2016 according to Market Watch.
In a letter to Secretary of Education Betsy DeVos, Senator Elizabeth Warren and Congresswoman Suzanne Bonamici urged the Department of Education to uphold the Obama-era ruling. The letter stated that the Department and Congress need to do more to protect borrowers.
Since these borrowers have already defaulted on their loans, they are obviously also unequipped to pay the accumulating collection fees. Our laws should encourage borrowers to cure their default. Excessive collection fees are unfair and only make student loans more unmanageable.
Bankruptcy Can Help Manage Student Loans
Chapter 13 reorganizes a borrowers finances, and will help manage the payment of delinquent student loans. Bankruptcy also stops the imposition of fees and interest on unsecured debts — including student loans.
The bankrutpcy court cannot discharge most student loans in a Chapter 7. However, a Chapter 13 reorganization can help borrowers get back on track.