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WASHINGTON -- More than five years after President Obama won his contentious fight to remove private lenders from the federal government’s student loan program, his administration is still sparring with parts of the student lending industry.

To be sure, the biggest battle -- stopping the flow of federal subsidies and guarantees to private lenders, which Democrats derided as wasteful -- is over. And there’s no serious effort in Congress to undo it.

But as the federally guaranteed loan program continues to wind down, the entities whose business it is to collect those loans, known as guaranty agencies, remain a dueling partner of the Obama administration.

The president last year signed a budget deal that cut millions of dollars’ worth of payments to guaranty agencies. The Education Department has put the brakes on a special program giving guaranty agencies contracts to service federal direct loans, and the Obama administration is now fighting efforts in Congress that would entitle guaranty agencies to even more of that loan servicing business.

The latest battle came Thursday, when a guaranty agency sued the Education Department in federal court over a letter the department sent last week prohibiting agencies from imposing collection fees on borrowers who default on their loans but quickly arrange to start repaying.

United Student Aid Funds, known as USA Funds, said the department has illegally created that reprieve for borrowers, which bars guaranty agencies from imposing their usual 16 percent collection fee if the borrower agrees to enter into a payment plan within 60 days of being notified that his or her loan is in default.

USA Funds argues that the Higher Education Act and the department’s rules allow, and in some cases require, the collection of that fee even if a borrower quickly responds to a demand for payment within the 60-day window.

The current lawsuit against the department’s new guidance stems from a separate legal case in which a Kansas woman sued USA Funds for charging her more than $4,500 to get her loan out of default.

The woman, Bryana Bible, took out loans under the federal bank-based lending program in 2006. After she defaulted in 2012 on about $18,000 in loans, court documents say, USA Funds notified her that she had the option to enter into a federal program to “rehabilitate” her loans and bring them out of default. Just eighteen days later, according to court documents, Bible sent in the paperwork to start repaying her loans under the rehabilitation program.

A federal district judge sided against Bible earlier this year, ruling that, in spite of her prompt response, USA Funds had the authority to charge her $4,500 in collection fees. She is appealing that decision, and in May the Education Department backed her position, telling the appeals court that the guaranty agency shouldn't have charged the collection fees because she quickly acted to start repaying her loan.

USA Funds alleges that the department’s position in court, followed by the guidance issued last week, amounts to a new rule governing guaranty agency collection fees that was unfairly applied retroactively and without a legal basis. 

An Education Department spokeswoman, Denise Horn, didn’t comment directly on the lawsuit but said the guidance “is consistent with department regulations and longstanding policies that protect borrowers who are attempting to get back into repayment.”

Ben Miller is senior director of postsecondary education at the left-leaning Center for American Progress and was a policy adviser at the Education Department during the switch to 100-percent direct lending.

Earlier this year, he criticized the fees guaranty agencies charge for borrowers to get their loans out of default, and called on the Education Department to reduce its reliance on the agencies to collect loans.

"These things sound trivial and they're totally inside baseball, but it really does matter for the borrower," he said Thursday. "The notion that a guaranty agency can charge a borrower an arm and a leg when that person tries to fix their default right away is unfair."

Even though no loans have flowed from the program since 2010, the Education Department is its still administering what is left of the federally guaranteed loan program: a dwindling but sizable $379 billion in outstanding debt owed by some 18.6 million Americans. More than 4.5 million of them are in default on their loans.

“The big step got taken care of in 2010, but the cleanup work is not finished,” Miller said. “Really we should be asking the question: Does the world still need guaranty agencies?”

The National Council of Higher Education Resources, which lobbies on behalf of guaranty agencies, declined to comment for this article. Advocates for the agencies have said in the past that cutting the payments to their industry will force them to provide less comprehensive services to help struggling borrowers stay current on their payments or help them climb out of default.

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