The System To Collect Defaulted Student Loans Is No Longer Functioning

Image courtesy of MeneerDijk

Consumers who expected their student loan payments to be deducted from their bank accounts this month have reportedly found the funds untouched, and their calls to the companies unanswered thanks to a Department of Education’s order prohibiting the debt collection companies from working on default accounts in response to two lawsuits against the agency.

The system used by the Dept. of Education to collect on defaulted student loans came to a standstill last month, leaving an estimated 91,000 accounts in limbo, when the agency ordered debt collectors under contract to stop making collections on accounts.

The order was in response to a U.S. District Court judge’s emergency order on Mar. 29 that prohibited the department from sending any newly-defaulted student loans to its other debt collection firms.

Judge Susan Braden has extended the emergency order [PDF] several times since then, noting that it was made to “preserve the status quo to protect the interests of all parties and to afford the government an opportunity to reach a global solution” to two lawsuits against the Dept. of Education.

The cases, filed separately by several debt collection firms, claim that the Dept. of Education unfairly terminated their contracts with the companies.

More recently, the Dept. of Education ordered servicers to stop work on defaulted accounts. The actions, the companies argued in court filings [PDF], “fundamentally alter the status quo and are not fiscally responsible to the borrowers or to the federal taxpayers.”

“Thus, the well-documented student loan crisis will become a pandemic not because this Court ordered that result, but because [Dept. of Education] thinks that is what this Court expects,” the companies argue.

This week, the Dept. of Education submitted a court filing detailing how the Judge’s order and its subsequent suspension of collection activities has affected consumers, Career Education Review reports.

The Dept. claims that the action “has effectively shut down the Government’s defaulted student loan collection program,” with an estimated 91,000 borrowers now stuck in limbo because their accounts weren’t assigned to a debt collector in April.

Additionally, the Dept. argues that by not assigning borrowers to collectors “tens of thousand of borrowers have been prevented from gaining access to rehabilitation programs” and other benefits.

BuzzFeed News reports that debt collection agencies say that since the Department ordered a stop to collection activities they have been inundated with calls from borrowers.

However, the companies can’t help the customers. This, they claim, has resulted in thousands of messages and complaints from borrowers.

The collectors, BuzzFeed reports, claim that because of this borrowers will re-default and those enrolled in repayment programs could lose their eligibility.

Suzanne Martingale, policy staff attorney for our colleagues at Consumers Union, tells Consumerist that the stop in collections and payments could do “untold damage to borrowers.”

“Meanwhile, they’re going to rack up a ton of charges as more interest accrues on their loans,” she adds.