Federal Appeals Court Reinstates Trump-Era Ban on Student Loan Collection Fees

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A month before student loan payments are set to resume, a federal appeals court has reinstated a rule prohibiting student loan guaranty agencies from charging collection fees from defaulted borrowers who quickly resume paying.

The rule was finalized by the Trump administration in 2019. It blocked guaranty agencies that administer federally backed student loans made before 2010 from recovering “collection costs” from borrowers who defaulted but took steps to repay or rehabilitate their loans in a timely manner.

The rule only applies to debt from the Federal Family Education Loan (FFEL) program, which was discontinued during the 2009–2010 academic year.

The FFEL has since been replaced with Direct Loans, a program under which eligible students and parents borrow directly from the U.S. Department of Education, so the rule doesn’t affect those who have taken out loans in the past decade.

Ascendium Education Solutions, one of the nation’s largest guarantors that collect FFEL debt on the Education Department’s behalf, sued in 2019 to reserve the right to impose charges on defaulted borrowers. The rule, Ascendium argued, is unlawful because it prohibits a guaranty agency from recouping costs based on when the costs are incurred, not whether such costs are reasonable.

A U.S. district judge ruled in March 2022 that Ascendium didn’t actually have standing to sue. However, the judge agreed that the practice of not allowing a guaranty agency to charge collection fees during default is a violation of Higher Education Act (HEA) and vacated the rule with respect to borrowers who enter rehabilitation agreements.

Reasonable Costs Only

In a decision issued Tuesday, the U.S. Court of Appeals for the District of Columbia Circuit overturned the 2022 ruling, with a panel of three judges ruling that the Trump-era rule is consistent with the federal education law.

“The Act permits guarantors to charge borrowers only for ’reasonable collection costs,' and the Department permissibly implemented that directive by ensuring that borrowers who create little or no collections work for a guarantor are not charged thousands of dollars in fees,” Circuit Judge Florence Pan, an appointee of President Joe Biden, wrote in the court’s opinion.

“Ascendium’s position—that the act always permits it to recoup collection costs from borrowers—conflicts with the statute’s clear, overarching directive that guarantors may collect only ’reasonable' fees,” she added.

Circuit Judge Reed Walker, an appointee of President Donald Trump, wrote in a separate concurring opinion that there is no need to cite any legal precedent to justify the rule, since the Education Department was acting “reasonably” within its rule-making authority.

“If Congress expressly and constitutionally empowers an agency to make a ’reasonable' regulatory choice, the validity of the agency’s action depends on no more and no less than whether the agency acted reasonably and explained itself reasonably,” he argued.

Tuesday’s ruling comes as the federal government is scheduled to resume collecting student loan payments.

Starting on Sept. 1, interest on federally held student loans will once again accrue after being suspended since March 2020 as part of the Trump administration’s effort to ease the economic burden on Americans grappling with the onset of the COVID-19 pandemic.

While interest on federal student loans will begin accruing this week, payments on those loans won’t come due for at least another month. The Education Department said it will notify borrowers “well before payments restart.”

Resuming Payments

In June, President Joe Biden announced a plan to establish a year-long “on-ramp” repayment program for those who may miss payments when they resume this fall. During the period, spanning from Oct. 1, 2023, until Sept. 30, 2024, the Education Department would not report borrowers to collection agencies or credit bureaus for late, missed, or partial payments, nor would it place any loans in default or delinquency.

However, interest would still accrue during the “on-ramp” period, meaning that the overall balances would balloon if borrowers didn’t make monthly payments that at least cover the interest.

In addition, Mr. Biden reintroduced his plan to “forgive” hundreds of billions of dollars of federal student loan debt, this time grounded in the HEA, which proponents of student loan cancellation argue allows the government to “compromise, waive or release” student loans.

Relying on the HEA to advance the plan, the Biden administration now turns to a typically lengthy, complicated process called “negotiated rule-making.” It is expected to first undergo many rounds of public hearings and months-long comment periods that require an extensive amount of public input before any changes can come into effect.

The original plan, which would cancel up to $10,000 in student loan debt for those earning less than $125,000 and another $10,000 for Pell Grant recipients who meet the income limit, was grounded in the HEROES Act, a law passed in the aftermath of the Sept. 11 terrorist attacks.

Although the Biden administration argued the HEROES Act would allow the education secretary to cancel student loans in response to the COVID-19 public health emergency, the U.S. Supreme Court wasn’t convinced.

“The HEROES Act … does not allow the Secretary to rewrite that statute to the extent of canceling $430 billion of student loan principal,” Chief Justice John Roberts wrote for the high court’s 6–3 majority, noting that what’s outlined in the president’s plan “created a novel and fundamentally different loan forgiveness program” that “expanded forgiveness to nearly every borrower in the country.”