Appeals Court Backs Ban on Loan Collection Fees

August 19, 2015

A federal appeals judge said Tuesday that student loan guaranty agencies are not allowed to charge collection fees to borrowers who default on their debt but quickly start repaying.

The U.S. Circuit Court of Appeals for the Seventh Circuit ruled in favor of a woman, Bryana Bible, suing United Student Aid Funds, known as USA Funds, for charging her $4,500 in collection fees after she defaulted on her loans but agreed to start repaying them within several weeks.

The appeals panel, voting 2-1, effectively sided with the Obama administration, which published a policy statement last month banning guaranty agencies from charging collection fees when defaulted borrowers take action to start repaying their loans within 60 days. The administration was not directly part of the case, but it filed a friend-of-the-court brief in support of the fee prohibition, which has been praised by consumer advocates.

USA Funds and other guaranty agencies argued that federal law allows them to charge fees in those circumstances and that the Obama administration wrongly and unfairly is trying to ban them retroactively. That argument was mostly rejected by the two judges on the panel who ruled in Bible's favor.

Robert P. Murray, vice president of corporate and marketing communications at USA Funds, said in a statement that the company was “disappointed” in the ruling and planned to ask the full appeals court to review the case.

“To be clear, this case is not just about the assessment of collection fees on a student loan borrower who has defaulted on her loans,” he said. "If allowed to stand, this ruling could cost U.S. taxpayers and diminish the support that tens of thousands of students receive to resolve their loan defaults and restore their good credit through rehabilitation of their defaulted loans,” he said.

Guaranty agencies like USA Funds have previously argued that reducing the fees they can collect may force them to scale back the counseling and default prevention efforts they provide borrowers.

USA Funds is separately suing the Obama administration over the fee policy in federal district court in Washington, D.C., where Tuesday’s appeals court opinion is not binding.
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