Home News Collection of Defaulted Student Loans Grinds to A Halt

Collection of Defaulted Student Loans Grinds to A Halt


A complex legal battle involving dozens of debt collection companies fighting over contracts with the Education Department has essentially suspended the government’s ability to collect defaulted student loans, the Trump administration disclosed in a court filing on Monday night. Responding to a request by companies that lost out on contracts, a federal judge issued an emergency order on Mar. 29 that prohibited the department from sending any newly-defaulted student loans to its other debt collection firms. U.S. Court of Federal Claims Chief Judge Susan G. Braden extended her emergency order several times in recent weeks, writing that she wants to preserve the status quo as the companies proceed with their lawsuit challenging the department’s contracting decisions.

— But the effect of the judge’s order, Justice Department attorneys said on Monday, “has effectively shut down the Government’s defaulted student loan collection program.” The Education Department estimates that some 91,000 borrowers, most of whom recently defaulted on their loans, are now stuck in limbo because the department couldn’t assign them to a debt collector during the month of April. Taxpayers are losing out on $640,000 each month in collections on student loans, according to the department.

— In addition, the delay in assigning borrowers to a debt collection firm means that “tens of thousands of borrowers have been prevented from gaining access to rehabilitation programs and other significant benefits,” an Education Department official wrote in an affidavit filed on Monday night. Struggling federal student loan borrowers are entitled under the law to bring their loans out of default by making a series of on-time payments – a process that is worked out between the borrower and the department’s debt collection firms.

— Judge Braden is holding a hearing this morning on how to proceed in the case. The hearing on the preliminary injunction begins at 10:30 a.m. at the U.S. Court of Federal Claims in Washington D.C.

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— Lauren Maddox worked on the Trump transition as a “sherpa” who helped to guide Education Secretary Betsy DeVos through the Senate confirmation process. Maddox has now returned to the Podesta Group, where she has signed as a new client the Charlotte School of Law — a troubled for-profit law school that’s been fighting for survival since the Obama administration cut off its access to federal student loans in December. The school has now re-applied for access to federal student aid in March “at the direct suggestion” of a top Education Department official, according to a letter from the school that was obtained by POLITICO. Maddox is also lobbying the Education Department on behalf of two other education-related clients, ECMC Group and Ceannate Corp., according to disclosure filings.

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