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Student Loan Law: 9.3.7 Preventing Tax Offsets

The only surefire method of avoiding a tax refund intercept for a borrower currently in default is to lower federal income tax withholding from earnings and any estimated tax payments. The taxpayer may complete a new IRS Form W-4 (Employee’s Withholding Allowance Certificate) to accomplish this. Then, at the end of the year, the taxpayer is not owed a refund and there can be no interception.

Student Loan Law: 18.2.2.3 Independent Collection Agencies and Attorneys

The FDCPA applies to independent collection agencies because debt collection is their principal purpose and they are also collecting debts owed to another.15 In 2021, the Department of Education terminated its contracts with private collection agencies.16 Currently, Maximus Federal Services, Inc. services all defaulted federal loans.17

Student Loan Law: 18.2.2.5 Servicers

In the Direct Loan Program, the Department hires private and nonprofit companies to service the loans.32 Federal Family Education Loan (FFEL) Program lenders and private student loan lenders may do the same. Servicers handle routine account tasks, such as receiving and processing payments, determining the amount outstanding, and reminding borrowers as to when payments are due.

Student Loan Law: 7.3.5 Costs Associated with Consolidation

When consolidating defaulted Direct Loans or FFEL Program loans, lenders may add up to 18.5% of the principal and interest to the amount due to pay for collection fees.115 However, for the past several years, the Department has been charging lower collection fees upon consolidation. In response to advocates’ questions, the Department stated in October 2016 that:

Student Loan Law: 8.4.3.1 “Reasonable” Collection Fees

The Higher Education Act (HEA) provides only that collection fees must be “reasonable.”158 The Department claims that this provision applies to all loans, whenever made.159 Promissory notes for many, but not all, student loans contain terms obligating borrowers to pay collection costs as well.160 The Department’s regulations require guaranty agencies to charge collection fees, whether or not provided for in the borrower’s promissory note.

Student Loan Law: 9.5.1 Introduction

In 1996, Congress strengthened the debt collection powers of federal agencies by enacting the Debt Collection Improvement Act (DCIA).309 Federal government agencies were given the authority to offset formerly exempt federal benefits to collect debts—such as federal student loans—owed to the government.310 A 2011 federal rule that strengthens protections for exempt federal benefits deposited into bank accounts does not apply to the government’s power to offset federal payments to collect fede

Student Loan Law: 18.2.2.4 Special Issues Involving Collection of Federal Student Loans

The FDCPA exception for “any officer or employee of the United States or any State”20 does not apply to collectors hired by the Department or a state, as the collector is not a governmental employee, but a private party contracting with a governmental entity.21 On the other hand, questions arise as to the FDCPA applicability because the HEA sets out certain collection standards in its due diligence collection rules.

Student Loan Law: 7.4.1 Introduction

A borrower can renew eligibility for new loans and grants and cure the loan default by “rehabilitating” the defaulted loan. To rehabilitate a Direct Loan or an FFEL Program loan, the borrower must make nine voluntary, reasonable, and affordable monthly payments—in amounts determined with the Default Resolution Group (DRG)120 or the collection agency—within twenty days of the due date during a period of ten consecutive months.

Student Loan Law: 9.3.5 The Review Process

A request for administrative review of an offset should be directed to the Department of Education, as it is the creditor agency. The IRS takes the position that there is no right to an administrative review of a tax intercept within the IRS.65

Student Loan Law: 9.4.1 Introduction

Both the Higher Education Act (HEA) and the Debt Collection Improvement Act (DCIA) of 1996 authorize administrative wage garnishment.106 Prior to 1996, the Department of Education (the Department) was the only federal agency with this authority. However, the enactment of the DCIA in 1996 extended this right to other federal agencies collecting debts owed to those agencies.107

Student Loan Law: 9.5.3.1 Notice and Hearing Rights

The offset process is managed by the Bureau of the Fiscal Service (BFS)340 of the Department of Treasury. Before referring a student loan debt to BFS for collection, the Department of Education is required to provide the debtor with a notice of intent to offset and an opportunity to review the basis for the debt.341 Guaranty agencies holding FFEL Program loans lack the authority to refer debts to the Treasury Offset Program.

Student Loan Law: 2.11 Master Promissory Notes

Master Promissory Notes (MPNs) allow borrowers to receive loans for a single period of enrollment or multiple periods of enrollment.271 If a school is not authorized for multi-year use of the MPN, a student or parent borrower must sign a new MPN for each academic year. Borrowers may receive more than one loan under each MPN over a period of ten years, as long as the school is authorized to make multiple loans and chooses to do so. Borrowers may elect not to receive more than one loan under an MPN.

Student Loan Law: 17.3.1 Brief History

Attracted by the financing provided by government student loan and grant programs, many predatory schools have exploited federally funded student assistance programs. Unfair and deceptive for-profit school practices are a tremendous source of frustration, financial harm, and loss of opportunity for consumers, particularly low-income students hoping to break out of poverty.

Student Loan Law: 5.5.1 Introduction

There are few laws specifically governing student loan servicer conduct. As described at § 5.4, supra, there are basic due diligence requirements in the FFEL and Perkins Loan regulations.

Student Loan Law: 5.6.1 Introduction

As discussed in § 5.3, supra, federal student loan servicers frequently misrepresent borrower options, misapply payments, fail to fully or accurately track payment histories or relevant qualifying payments for forgiveness programs, fail to timely process applications for loan relief options or consolidation, fail to respond to complaints or other inquiries, or otherwise engage in unfair or deceptive prac

Student Loan Law: 18.3.3.2 UDAP Claims

Every state has a statute broadly prohibiting deceptive practices and most states also prohibit unfair practices. These are generally referred to as unfair and deceptive acts and practices (UDAP) statutes. Every state provides a private UDAP remedy for actual damages. Most states also provide for attorney fees to the prevailing consumer, and in some cases statutory, multiple, or punitive damages. A state-by-state summary of all UDAP statutes is found at NCLC’s Unfair and Deceptive Acts and Practices.251

Student Loan Law: 18.2.7 Other Federal Claims

Two federal provisions apply to debt collectors that submit inaccurate information to consumer reporting agencies. The FDCPA makes it a per se violation for a debt collector to report to any person—including a consumer reporting agency—“credit information which is known or should be known to be false, including the failure to communicate that a disputed debt is disputed.”192