The system used by the Dept. of Education to collect
on defaulted student loans came to a standstill in the last month, leaving
an estimated 91,000 accounts in limbo, when the agency ordered debt collectors
under contract to stop making collections on accounts.
As Consumerist's Ashlee Kieler reports, 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 strange turn of events began with a lawsuit filed by
two debt collection companies, who claim they were unfairly were fired by the
Obama-era Education Department for poor performance. On March 29, the judge issued a temporary restraining order that prevented
any new defaulted borrowers from being assigned to debt collectors and put into
rehabilitation programs. Instead, the borrowers have piled up inside the
department's system, waiting.
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On April 21, the government ordered the debt
collectors involved in the suit to stop work altogether on defaulted accounts:
no phone calls, no withdrawals from student accounts, nothing.
The Education Department and the Justice Department are
partly to blame for "unnecessarily" throwing a wrench into the entire
defaulted loan system, one attorney with
knowledge of the case told BuzzFeed News, because they've been unable to
come to a resolution that allows the loan system to kick back into gear. "There's
no fix in sight."
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.
As the work stoppage drags on, consumer protection
advocates are confused about where borrowers stand, especially given a tangle
of other lawsuits involving the loan companies and the government. "The
whole process has been completely mind-boggling," said Persis Yu,
the director of the Student Loan Borrower Assistance Project at the National
Consumer Law Center, who called the standstill "mystifying from a consumer
protection standpoint."
http://www.zerohedge.com/news/2017-05-07/crisis-has-become-pandemic-system-collect-defaulted-student-loans-no-longer-function
