Feds: 234,000 Borrowers Could Be Stuck in Default

May 23, 2017

About 234,000 defaulted student loan borrowers with debt valued at $4.6 billion will be stuck in limbo and unable to get out of default if a judge's order is not lifted this week, the Department of Education said in a court filing Friday.

James Runcie, the chief operating officer of the Office of Federal Student Aid, provided those figures in a court filing that was part of an ongoing legal dispute over the awarding of new debt collection contracts last year. Last month, a U.S. Court of Federal Claims judge overseeing the case issued a restraining order preventing the government from assigning newly defaulted borrowers to debt collectors -- a key step for those borrowers to eventually rehabilitate their loan debt.

"The delay in providing [private collection agency] services to borrowers has significant negative impacts on both the government and on borrowers and their families," Runcie wrote.

Collection on student loan accounts increases significantly when assigned to collection agencies and many borrowers are able to access rehabilitation programs, he said. After a successful loan rehabilitation, borrowers can have the record of a default removed from their credit reports and return to regular servicing with fewer collection costs.

If the judge's order is not lifted, the government will lose out on collecting $2.4 million in payments by the end of June, Runcie said in the filing.

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