A recent action by a Court of Federal Claims has effectively stopped the collection of defaulted student loans – but for those affected, this is cause for concern, not celebration. To understand why, it's important to look at the fate of defaulted loans and how those attempting to recover from the situation are being harmed by this gridlock.
You have several options when you are struggling to keep up with student loan repayments, but once you have reached the point of default, the options are few and grim. One of the preferable options is entering a federal loan rehabilitation agreement with the Department of Education. You establish a repayment program that falls within their guidelines, and while missed payments stay on your credit report, the record of the default is removed. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips. The Department of Education uses contract collection agencies to oversee collection of these repayments.
In 2015, five of these collection agencies had their contracts cancelled by the Obama administration after an audit concluded that the agencies were giving incorrect information to debtors trying to escape default. Four of those agencies took legal action against the Department of Education, thus setting in motion the actions that led to the recent court ruling.
Fast forward to February 2017, where the Trump administration attempted to settle the ongoing litigation by reconsidering assigning accounts to the agencies and disregarding the audit results – but without suitable compensation for the lost business to date. Two companies accepted the deal while two rejected the deal.
Meanwhile, a second dispute arose over the contract opened for bids in December 2015. Continental Services Group (ConServe) filed a bid protest with the Government Accountability Office (GAO) in December 2016, along with other rejected bidders. The GAO filing is supposed to trigger an automatic stay on work done within that contract. The restraining order was issued on March 29 after ConServe charged that the Department of Education was finding ways around the stay.
On April 21, the government mandated that all of the debt collectors involved in the legal action must stop working on any activity related to defaulted accounts, including answering questions regarding defaulted loans and accepting withdrawals from student accounts.
Unfortunately, those affected by the halt in collections are stuck in limbo. The loan rehabilitation programs generally require consecutive payments, and there's no guidance on what happens when borrowers are willing and able to make those payments but the collection agency is prevented from receiving them.
The Department of Education and the affected collection agencies are already swamped with calls that they cannot or will not address – but if you are in this situation, your best bet is to keep trying to contact both the collection agency and the Department of Education to make sure that you do not fall through the cracks. Make sure that you keep records of your attempts to contact the collection agency and evidence of the ability to pay (such as rejected auto-payments to the collection agency).
Keep in touch with current news on the topic (besides reading MoneyTips, that may require boring Google searches through legal sites). Unless the Department of Education is able to grant some form of temporary amnesty or suspension of the rules, borrowers run the risk of a secondary default or being kicked out of the loan rehabilitation program – an outcome that is not in anyone's best interests but could easily come to pass.
In that worst case, you may have to look at loan consolidation options that can still allow you to set up reasonable repayment plans, although you will not be able to remove the default from your credit history. Further information may be found at the Federal Student Aid website.
Consider contacting your representatives in Congress and apprise them of the situation. They may have trouble getting major issues passed, but the opportunity to help a number of their constituents caught in a bureaucratic nightmare is likely to draw their attention.
If you are still paying off student loans but are not in default, you are not affected by this action. Consider yourself lucky, but also consider yourself wise because you avoided potential default in the first place. You took the advice of Millennial Money Expert Stefanie O'Connell regarding student loans: "Paying it back is not a passive practice. The best thing you can do about tackling your student loan debt is to be proactive."
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June 6 is National Higher Education Day. In observance of the day and graduation season, MoneyTips has prepared an exclusive five-part series to highlight how student loans are affecting current and potential student borrowers. Read the first article in the series to learn how the shutdown of an important government tool has caused issues for those applying for student loans. Check out the third article in our Student Loan Crisis series, which reveals that many borrowers defaulting on their student loans surprisingly are not making use of affordable repayment plans.