Legal Challenge Could Leave 234,000 Borrowers Stuck in Default

Hundreds of thousands of defaulted student loan borrowers could be stuck in limbo in the wake of a complex legal battle involving dozens of debt collection companies fighting over contracts with the U.S. Department of Education, Inside Higher Ed reported. Last month, a U.S. Court of Federal Claims judge overseeing the case issued a order prohibiting the department from sending any newly-defaulted student loans to debt collection firms—a key step for those borrowers to eventually rehabilitate their loan debt.

The department estimates that nearly 234,000 defaulted student loan borrowers with debt valued at $4.6 billion could be affected, and unable to get out of default, if the judge's order is not lifted this week, according to a court filing.

"The delay in providing [private collection agency] services to borrowers has significant negative impacts on both the government and on borrowers and their families," wrote James Runcie, the chief operating officer of the Office of Federal Student Aid.

Collection on student loan accounts increases significantly when assigned to collection agencies and many borrowers are able to access rehabilitation programs, he said. After a successful loan rehabilitation, borrowers can have the record of a default removed from their credit reports and return to regular servicing with fewer collection costs.

Without action to lift the judge's order, the government will lose out on collecting $2.4 million in payments by the end of June, Runcie said in the filing.


Related Links

U.S. Department of Education Court Filing

Inside Higher Ed