On March 16, 2017 the U.S. Department of Education (ED or Department) issued a “Dear Colleague” letter withdrawing the statements made in its “Dear Colleague” letter dated July 10, 2015. That letter was titled “Repayment Agreements and Liability for Collection Costs on Federal Family Education Loan Program (FFELP) Loans,” and prohibited guarantee agencies from charging collection costs to borrowers who have defaulted, but quickly enter a repayment agreement.

Last week’s letter says the position stated by ED in the July 2015 letter did not incorporate public input, and therefore is being withdrawn.

The original letter came about after the U.S. Court of Appeals for the Seventh Circuit requested ED’s input in the case of Bible v. United Student Aid Funds, a case in which a consumer challenged the assessment of collection costs which defendant claimed were permitted by the regulations. In response, the Obama Adminstration's ED Department submitted an amicus brief announcing its position that collection costs should not be charged, and later issued the Dear Colleague letter, clarifying its previously ambiguous rules.

The March 2017 letter clarifies that it does not apply to borrowers whose loans are held by ED, as the Department does not charge borrowers collection costs under the same circumstances covered by the July 2015 letter.

On March 13, four days prior to the release of this latest letter, U.S. Senator Elizabeth Warren and House Member Suzanne Bonamici submitted a letter to the newly installed ED Secretary Betsy DeVos, urging her to uphold the Department’s previous guidance. They argued that Guaranty agencies incur minimal cost to collect from borrowers who promptly enter rehabilitation, which is one of the reasons why the distinction is made between those who quickly enter repayment and those who don’t.

insideARM Perspective

According to The Washington Post, this action could impact nearly 7 million people with $162 billion in FFEL loans held by guarantee agencies (although this number represents total outstanding FFEL loans, not the percentage of those loans in default). Citing ED statistics, the Warren-Bonamici letter states that 4 million, or one-quarter, of FFEL borrowers are in default on approximately $66 billion.

Established in 1965, the FFEL program enabled millions of Americans, regardless of their credit-worthiness, to borrow money for college at reasonable interest rates. The loans were made by private lenders, and guaranteed by the government. The program came to an end with the passage of the Health Care and Education Reconciliation Act of 2010 (HCERA), which required that all loans originated after July 1, 2010 would be made through ED’s direct lending program.

This latest action by the Trump Administration Department of Education is a political science lesson on the impact of changes in government polices after a change in administration.

For those interested in an insightful and more detailed history of the Federal Student Loan market, see this post published in 2012 by insideARM, written by Don Taylor, an industry executive with decades of experience in the space.

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