A student loan guarantor run by a former Bush administration official has sued the Education Department for the right to impose thousands of dollars in fines on struggling borrowers who default on their student loans, but immediately make efforts to repay them.
The case, which was first reported by the website Inside Higher Ed, is the latest in a series of clashes between the government and the cadre of private agencies it contracts with to guarantee, service, and collect on its massive portfolio of federal student loans. Many of those private firms have been accused of misconduct and abuse, acting against the interests of student borrowers in the pursuit of profit.
In 2012, USA Funds, a guarantor in a now-defunct student loan program, charged a woman named Bryanna Bible $4,500 in collection fees after she defaulted on her student loans, despite the fact that she started to repay them just 18 days later. The Education Department sided with Bible in a court case, saying that agencies were required to give borrowers a 60-day window to begin repaying their loans before hitting them with massive collection fees.
But USA Funds said the Department shouldn't be allowed to impose such a rule, and is fighting in court to be allowed to fine borrowers like Bible regardless of whether they make efforts to get their loans out of default. The firm's CEO, William Hanson, was a high-ranking education official under George W. Bush, steering the administration's higher ed policy.
The practice of tacking on large collection fees — which can go as high as 16% of a loan's balance — regardless of efforts to repay is common, and heavily criticized, among private student loan guarantors.
The Obama administration worked to end the lending program that put USA Funds into business, barring private corporations from originating federal student loans. But it still partners with private guarantors to service the loans they previously originated.
The Education Department has struggled to keep those lenders, and other private loan firms it does business with, in check.
One nonprofit it regularly contracts with, ECMC Group, has been routinely accused of “ruthless tactics” in the way it pursues borrowers who try to discharge ECMC loans in bankruptcy, chasing after people with terminal illnesses for their full loan sums.
And the department was forced to cut ties with many of its private guarantee agencies earlier this year, saying they had been misleading borrowers in order to maximize profits. An audit by the Inspector General had found the government's oversight of the guarantors was lacking.
The Education Department contracts with ECMC Group, but does not employ the company to pursue bankrupt borrowers. A previous version of this story misstated the department's relationship with ECMC in relation to bankruptcy proceedings.