The Trump administration just made it easier for collections agencies to profit off borrowers who have defaulted on their student loans.
According to the Chicago Tribune, Trump sent a letter to agencies that collect payments from borrowers who have defaulted on student loans, telling them they no longer have to adhere to an Obama-era rule forbidding them from tacking on extra fees.
Who does this effect?
The main impact will be on people who got money for college through the Federal Family Education Loan (FFEL) program, which allowed borrowers to receive federally insured and subsidized loans from private lenders. Though that program was eliminated in 2010, millions of borrowers are still paying off their debts. The rollback on this protection will specifically affect those who have fallen critically behind, or "defaulted," on their FFEL loans, and have entered a rehabilitation program whereby they pay a smaller amount for set a period time to prove they are financially responsible.
Natalia Abrams, the executive director of Student Debt Crisis, told ATTN: that borrowers with FFEL loans comprise just under half of the 8 million people who have defaulted on their student debt, and could be become subject to these extra fees. As Abrams explained, these people are often those with the least ability to pay, given that they've already entered default.
"Collection agencies were allowed charge collection fees when you go into default, up to 16 percent. The Obama administration said, 'do not charge that collection fee,'" Abrams said. "Now, the collection agencies can go back to charge these fees again."
Why don't people just apply for income driven repayment instead of defaulting?
That's because, in most cases, borrowers with these old FFEL loans don't have the same income based repayment options as those who got direct loans from the federal government in the last couple of years — unless they choose to consolidate.
So, what happens to borrowers who can't pay their FFEL loans? They enter default, and are put on a plan managed by the federal government and serviced by a collections agency.
Who will benefit from these fees?
Abrams said the collections agencies, who are already paid by the federal government to service payments made by people in rehabilitation programs, will now make even more money off borrowers in default.
However, those fees won't get the borrower any closer to paying off their loans, and might make it even harder for them to complete the default process, which would result in the bank who owns the loan being able to garnish their wages, Abrams said.
The new regulations come at a bad time.
The Washington Post reported on Tuesday that the number of people defaulting on their student loans is "soaring," and the bulk of people who are defaulting are those with FFEL loans.
From the Post:
"Nearly half of the outstanding debt in default comes from the old bank-based federal lending program, known as the Federal Family Education Loan (FFEL) Program. There has been a fairly steady increase in the total amount of past-due debt in the program, even as the number of borrowers has declined, suggesting that interest charges and other fees are being tacked on to balances."
"[The fees] are going to hurt borrowers," Abrams said. "People who are already in default don’t need an extra 16 percent tacked on. It’s just silly."
This story was updated to clarify the number of borrowers holding FFEL loans.