The trouble signs started flashing in March, when the Department of Education gave a group of student debt collectors permission to once again start slapping heavy fees on delinquent borrowers who were trying to catch up on loan payments. The practice had effectively been banned during the Obama administration. In a pleasantly unexpected turn, all of the organizations affected by the move announced that they would not bring back the penalties. But the incident was still disturbing, both because it demonstrated DeVos’ willingness to side with businesses over borrowers and because it may have involved a astounding conflict of interest.
The controversy centered on a slightly obscure group of nonprofits known as guarantee agencies, which are responsible for collecting and rehabbing defaulted loans that were made as part of the government’s old, bank-based student lending scheme (though the program was discontinued in 2010, there are still hundreds of billions of dollars of loans still outstanding from it). Up until 2015, when the Obama administration determined the practice was illegal, these organizations were notorious for charging high fees to borrowers who had defaulted on their debts but promised to pay up on them within 60 days. These penalties—equal to 16 percent of a borrower’s total loan balance—could be punishing. In one notable case, a Kansas woman sued the country’s largest guarantee agency, United Student Funds, after it charged her $4,500 in fees just to bring her loan current. But following the Obama administration’s clampdown, United Student Funds filed its own lawsuit claiming the penalty fees should have been permitted under the law. That case lingered on through this year.
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