The US Department of Education not have the legal authority to issue all federal student loans through executive action. However, there are certain limited circumstances under which the US Department of Education can compromise on a case-by-case basis (e.g., cancel or cancel federal student debts).
The Department of Education can also suspend or end the collection of defaulted federal student loans. Below we break down the situations in which federal student loan borrowers may receive a compromise, suspension, or termination of the debt collection activity.
Does the Ministry of Education ever compromise federal student debt?
The US Department of Education sometimes pays long-term federal student loans at a discount. The three standard billing offers include:
- A waiver of collection fees
- A waiver of half of the interest accrued since the loan defaulted
- Reduce the outstanding credit balance by 10%.
These severance payments are to be paid in a lump sum by the end of the year. They generally exceed the amounts the US Department of Education could collect through garnishment of wages and offsetting income tax refunds and social security benefits.
What Legally Authority Does the Ministry of Education have to compensate the federal debt for students?
As discussed in Is Student Loan Granting By Legal Order Discussed, the President and Secretary of Education have no legal authority to implement comprehensive student loan waiver unless specifically approved by Congress.
But the Money and Finance section of the US Code, passed in 1982, gives federal agencies (such as the Department of Education) legal authority to offset debts to the federal government under certain circumstances. These circumstances can include federal education loans, not just state contracts.
The power to compromise federal student loans manifests itself most often with respect to defaulted federal student loans and student loan bankruptcy waivers. Federal authorities are obliged “All appropriate steps” collect all outstanding debts before they are settled. [31 USC 3711(g)(9)] These steps include:
- Administrative offset
- Compensation for tax refund
- Federal salary adjustment
- Forwarding to private debt collection agencies
- Mediation with federal authorities that operate a debt collection center
- Reporting defaults and defaults to credit bureaus
- Garnishment of wages
According to 31 USC 3711 (a) (2), Federal agencies can compromise claims up to $ 100,000 (excluding interest) in two circumstances:
- “It appears that no person liable for the claim is presently or likely to be able to pay a significant amount of the claim, or
- The costs of collecting the claim are likely to exceed the amount recovered. ”
What Regulatory Authority Does the Ministry of Education have to compensate the federal debt for students?
The U.S. Department of Education relies on the regulations in 31 CFR 902 and 31 CFR 903 to decide when to compromise, suspend, or end student federal debt.
The regulations of 31 CFR 902.1 state that the authority to offset debts of $ 100,000 or less (excluding interest, penalties and administrative costs) rests with the federal agency (ie, the US Department of Education). in the meantime, the US Department of Justice has the authority to offset debts in excess of US $ 100,000.
The regulations in 31 CFR 902.2 establish several bases for the Department of Education to offset student government debt, including when:
- The borrower is unable to repay the entire claim within a reasonable period of time (including through a forced collection process);
- The costs of collecting the claim do not justify the compulsory collection of the full amount.
- There are serious doubts about the ability of the federal government to prove its case in court.
Let’s take a closer look at how the Department of Education determines when a borrower is unable to repay a debt and when the collection costs are considered unjustified.
When is a borrower unable to repay a debt?
In determining whether the borrower is unable to repay the debt, 31 CFR 902.2 (b) instructs federal agencies to consider the following:
- Borrower’s age and health
- Current and Potential Income of the Borrower
- Inheritance prospects
- Possibility that the borrower has hidden or improperly transferred assets
- Availability of assets or income through foreclosure proceedings
This information should be verified by the federal agency against credit reports and other financial information, such as:
When are the “collection costs” considered too high?
Guarantee agencies can opt out of an FFELP loan against an application for undue hardship, if “The expected costs for the objection to the dismissal request would exceed” one third of the total amount owed to the loan. “ Otherwise, the guarantee agencies are obliged to object to the borrower’s application for dismissal or, if necessary, to agree to partial discharge in order to obtain a judgment against the borrower.
Similar rules apply to the Federal Perkins Loan program. And the US Department of Education has a similar process with the Direct Loan program, although there are no regulations that require it.
In practice, the one-third calculation does not seem to occur. The cost of litigation often exceeds a third of the average student loan debt borrowers seek to pay through an unjustified hardship. Why should the Ministry of Education refuse petitions when the cost of collecting is so high? It seems ready to do so simply to prove a point and scare off future borrowers.
Pursuant to 31 CFR 902.2 (e), the federal government can continue to collect a claim even if the costs of recovery exceed the potential recoveries if this is to prove their “Willingness to aggressively pursue defaulting and uncooperative debtors” as a deterrent to other borrowers defaulting on payments.
How is the student loan compromise amount determined?
In 31 CFR 902.2 (c) it dictates that compromises must be endured “a reasonable relationship to the amount that can be collected through enforced debt collection procedures …” But the amount accepted in the compromise can reflect:a reasonable discount for the administrative and legal costs of the collection. “
If there are serious doubts about the ability of the federal government to prove its case in court, “The amount that will be accepted as a compromise for such cases should adequately reflect the likelihood of successful prosecution pending judgment.” Court and lawyer fees must also be taken into account.
Compromises usually have to be paid in lump sums and not in installments. The federal agency must report any debts paid to the IRS. And when a debt is settled, the federal agency must release all liens that secure the debt.
What about the suspension and termination of collection activities?
Federal agencies can Suspend collection a fault if:
- Agency can not find the borrower, or
- The borrower’s financial situation is expected to improve
Federal agencies can End collection a fault if:
- Agency cannot find the borrower
- The agency is unable to collect a significant amount owed
- The collection costs are expected to exceed the potential returns
- Debt is legally unfounded
- The foreclosure is statute-barred
- Debt cannot be proven or the debt has been remitted in bankruptcy.
It is important to understand that even after the collection has ended, the federal authority may continue to carry out collection activities if the borrower’s financial circumstances change, a new collection tool becomes available, or previously unavailable income or assets can be offset. This means that there is little practical difference between suspending and stopping collecting.
Finally, federal agencies can choose sell the debtwhen the sale is in the best interests of the United States. However, the U.S. Department of Education must first meet the requirements listed above to stop collecting.
The Department of Education cannot provide student loans without the approval of Congress. However, it does have the power to compromise, suspend, or end federal student loan recovery in certain circumstances. This power to compromise is generally limited to situations where the debt is deemed “bad”.
It might be worthwhile to compromise on a government student loan if your financial situation really makes you unable to repay your loan or if the cost of collecting your debt would be very high. Otherwise, you should focus on other student debt relief measures, such as: