By Ben Kaufman and Amber Saddler | September 2, 2021
Guaranty Agencies are student loan companies that insure, service, and collect on student loans. Working as relics of the now-defunct Federal Family Education Loan Program (FFELP), they continue to have a huge impact on student loan borrowers, even though they are effectively now dinosaurs operating as legacy holdovers into the Direct loan era.
Unfortunately, it appears that Guaranty Agencies have once again broken the law—actively working against borrowers’ best interests and in violation of clear directions from the Department of Education (ED), even as COVID-19 has surged nationwide this summer. In particular, new evidence uncovered through a Freedom of Information Act (FOIA) request indicates that Guaranty Agencies did not comply with Department of Education guidance directing them to stop garnishing wages from defaulted borrowers during the COVID-19 pandemic. Instead, our findings reveal that Guaranty Agencies actively continued to take from defaulted borrowers’ paychecks even after being explicitly ordered to halt this practice and refused or failed to return tens of millions in illicitly seized wages to borrowers.
Borrowers across the country deserve answers, and the companies that ignored clear instructions to stop stealing from the most financially strained borrowers need to be held accountable.
Despite Talk of Their Demise, Guaranty Agencies Continue to Play a Massive Role in the Student Loan System
Guaranty Agencies are large, opaque, and often dangerous players in the student loan system. Under the FFELP, which was the dominant federal student loan program until 2010, Guaranty Agencies insured student loans made by banks and other private creditors against borrower default. If a borrower stopped making payments for a long enough period of time, the Guaranty Agency would pay out a claim to the loan holder and become the owner of the debt. The Guaranty Agency would then try to collect on the debt, using harsh methods such as wage garnishment and the offset of federal benefits including Social Security checks and stimulus payments.
Since Congress transferred sole authority to originate federal student loans to the Department of Education in 2010, Guaranty Agencies have effectively been little more than legacy relics of a past system. This was the same period when Guaranty Agencies began chasing new sources of revenue, including buying doomed for-profit schools and acting as consultants that help schools evade accountability metrics at students’ expense. At Congress’s direction, the Obama administration developed a plan to wind down the Guaranty Agencies over time.
These massive companies still have a bewilderingly large presence in the student loan landscape.
But that was more than half a decade ago—and these massive companies still have a bewilderingly large presence in the student loan landscape. Roughly 6 million borrowers continue to owe on more than $153 billion in privately owned loans originated under FFELP—so-called “commercial FFELP” loans, which are the variety of loans that can fall under Guaranty Agencies’ ambit— and roughly 880,000 of these borrowers are in default on $23.7 billion in commercial FFELP loans.
ED Charged the Guaranty Agencies with Delivering Badly Needed Relief for Defaulted FFELP Borrowers During COVID
For most of the COVID pandemic, ED allowed lingering legal complications stemming from the bailout of the student loan industry during the 2008 financial crisis to prevent commercial FFELP borrowers from accessing relief available to borrowers with other forms of federal student loan debt. For example, commercial FFELP borrowers in general have not been afforded the zero-interest payment pause that borrowers owing on Direct loans have enjoyed since March 2020.
However, in March 2021, the Biden administration took a key first step to offer commercial FFELP borrowers some amount of relief. In particular, ED announced that commercial FFELP borrowers who are in default would enjoy the same protection from student loan debt collectors that has been available to borrowers in default on other kinds of federal student loans during COVID.
A May 2021 letter from the Department of Education’s Office of Federal Student Aid (FSA) detailed what the implementation of this expanded protection would mean, stating that Guaranty Agencies must take at least the following actions:
- “Payments received through Administrative Wage Garnishment (AWG), the Treasury Offset Program (TOP), and other forms of involuntary collection since March 13, 2020, must be refunded;
- Borrowers who made voluntary payments must be given the option for a refund of those payments;
- All forms of involuntary collection must be suspended; [and]
- All collection attempts (including billings) must cease; . . . ”
In August 2021, the Student Borrower Protection Center submitted a FOIA request to FSA seeking data that would allow us to discern whether Guaranty Agencies had taken these mandated steps.
Guaranty Agencies Continued to Take Advantage of Defaulted Borrowers in Violation of ED’s Orders
The results of our FOIA request are available here. SBPC analysis of these documents indicates that Guaranty Agencies did not comply with ED’s clear orders to stop preying on defaulted student loan borrowers and to affirmatively make them whole for wages seized during the pandemic.
In particular, SBPC analysis of data that ED produced in response to our FOIA revealed the following:
- At least one Guaranty Agency continued to garnish defaulted borrowers’ wages in direct violation of ED’s instructions. Analysis of data that ED provided in response to our FOIA request indicates that one Guaranty Agency, Ascendium, continued to collect over $3.9 million from defaulted commercial FFELP borrowers in June 2021. As the May 2021 FSA letter cited above makes clear, Ascendium’s actions took place during a time when the company was meant not just to have halted garnishments, but to have begun actively refunding past garnishments. Ascendium is already the subject of an investigation by the Consumer Financial Protection Bureau into another unrelated matter.
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Guaranty Agencies did not comply with orders to return over $37 million in wages garnished from student loan borrowers during COVID. Despite ED’s clear May order for Guaranty Agencies to refund garnished wages, the results of our FOIA request indicate that $12.9 million in cumulative wages garnished since the start of the federal fiscal year in October 2020 had not been refunded by June 2021. The Guaranty Agencies were already clearly told that every dollar of these garnishments was meant to be returned, but it appears they either failed or refused to comply.
Further, publicly available data indicate that from March 2020 to October 2020 an additional $24.8 million in wages were garnished from defaulted commercial FFELP borrowers. These garnishments also fall within the period during which refunds under ED’s orders are clearly meant to retroactively apply, and yet the documents we uncovered make clear that this money was not refunded.
In sum, the data that ED provided in response to our FOIA request make clear that these $37 million in cumulative garnishments—taken out of vulnerable borrowers’ paychecks during a once-in-a-generation pandemic—were not returned as of June 2021, even in the face of ED’s black-letter mandate for them to be refunded.
The results of our FOIA request make clear that despite ED’s orders, the most vulnerable student loan borrowers continued to have money taken out of their paychecks during an ongoing pandemic. These findings are only the latest unfortunate reminder that America’s student debt collection machine has grown beyond anyone’s ability to control it, including the Department of Education’s.
Borrowers Deserve Answers and Accountability
While damning on their own, the results of our FOIA request also leave key questions related to Guaranty Agencies’ implementation of FSA’s May 2021 guidance unanswered. In particular, it remains unknown how many borrowers have been harmed by Guaranty Agencies’ conduct, what proportion of these legacy actors’ cumulative garnishments have been refunded, and what systems are in place at the Department and Guaranty Agency level to ensure that borrowers are delivered the relief that they are entitled to. These questions are extremely pressing—there is already evidence that another Guaranty Agency, ECMC, also continued to garnish defaulted commercial FFELP borrowers’ wages after FSA’s May guidance.
So that we might begin working toward answers and justice for borrowers, we have written a letter to the nation’s top consumer watchdog, the Consumer Financial Protection Bureau, raising and contextualizing the findings presented here. As mentioned above, the Bureau is already investigating whether Guaranty Agencies may “have improperly caused borrowers to incur costs or fees or have improperly charged or collected fees in a manner that is unfair, deceptive, or abusive. . . .”
Our letter to the CFPB related to our findings regarding Guaranty Agencies is available here.
More broadly, it’s time for the Department of Education to step in to ensure that Guaranty Agencies are held responsible for flagrant violations of its orders and to substantially ramp up transparency and accountability around the execution of relief for defaulted commercial FFELP borrowers. Through no fault of their own, commercial FFELP borrowers have spent almost 18 months unable to access badly needed relief available to those who happen to owe on other forms of federal student debt.
ED can no longer simply assume that mandating the debt collection industry stop preying on and provide relief for these borrowers will be enough to ensure they will do it.
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Ben Kaufman is the Head of Investigations and a Senior Policy Advisor at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked as a Director’s Financial Analyst on issues related to student lending.
Amber Saddler is Counsel at the Student Borrower Protection Center. A recent graduate of the Howard University School of Law, Amber joined SBPC after completing a fellowship at the Alliance for Justice where she worked on federal judicial nominations and access to justice issues.