Business

How The Student Loan Collection System Ground To A Halt

The system for collecting overdue student loan payments has been thrown into chaos by a judge's restraining order.

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For more than a week, calls to student loan debt collectors have gone unanswered across the country, and pleading, confused voicemails have been ignored. Work shifts have been cancelled, and money slated to pay off loan balances sits in borrowers' bank accounts, untouched.

A crucial part of the student loan system — affecting tens of thousands of borrowers and billions in loan debt — has essentially ground to a halt, the bizarre result of a low-profile lawsuit against the Education Department.

"Essentially, the Court has shut down the Government’s defaulted student loan collection program," an Education Department lawyer said in a court filing.

Lawyers for some debt collection companies have warned the judge overseeing the case that a massive student debt backlog is growing: 91,000 borrowers and counting who have stopped paying their loans, but haven't been put in programs meant to help them get out of default.

The strange turn of events began with a lawsuit filed by two debt collection companies, who claim they were unfairly were fired by the Obama-era Education Department for poor performance. On March 29, the judge issued a temporary restraining order that prevented any new defaulted borrowers from being assigned to debt collectors and put into rehabilitation programs. Instead, the borrowers have piled up inside the department's system, waiting.

On April 21, the government ordered the debt collectors involved in the suit to stop work altogether on defaulted accounts: no phone calls, no withdrawals from student accounts, nothing.

The Education Department and the Justice Department are partly to blame for "unnecessarily" throwing a wrench into the entire defaulted loan system, one attorney with knowledge of the case told BuzzFeed News, because they've been unable to come to a resolution that allows the loan system to kick back into gear. "There's no fix in sight."

Among the debt collectors who say they have been prevented from servicing accounts are Transworld Systems, the CBE Group, Premiere Credit of North America, and Windham Professionals.

The Education Department declined to comment, citing ongoing litigation.

Student debt collection companies warn that far from offering a reprieve for borrowers in default, the stoppage has the potential to cause them real problems.

The order to stop work, said one affidavit from a debt collector, Transworld Systems, "has created a service interruption that will likely cause significant harm to borrowers, including damaged credit, confusion, the accrual of unnecessary interest, and excessive wage garnishment.

Borrowers who have taken the steps needed to be removed from default status — an important step in repairing your credit record — haven't actually been removed, the companies claim, even though they are eligible. Thousands more are in danger of being kicked out of loan rehabilitation programs — which require nine consecutive repayments — if money is not withdrawn from their accounts.

And as voicemails pile up with borrower questions and complaints, the companies say they are unable to respond. Transworld said that in the space of a few days, a borrower had already filed a complaint about being ignored.

The stoppage "resulted in thousands of unanswered borrower calls and borrower complaints," said a court filing from earlier this week. "Meanwhile, the student loan crisis worsens and the program to deal with it is paralyzed."

In the three days that followed the Education Department's order, said one executive at another debt collection agency, 168 borrowers' calls went unanswered in his company alone. "There will be re-defaults that will harm borrowers," the executive said in an affidavit.

As the work stoppage drags on, consumer protection advocates are confused about where borrowers stand, especially given a tangle of other lawsuits involving the loan companies and the government.

"The whole process has been completely mind-boggling," said Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, who called the standstill "mystifying from a consumer protection standpoint."

Molly Hensley-Clancy is a business reporter for BuzzFeed News and is based in New York. She covers the intersection of business and education.

Contact Molly Hensley-Clancy at molly.hensley-clancy@buzzfeed.com.

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