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US debtor-protection law applies to student-loan collection efforts

The Fair Debt Collection Practices Act may provide legal remedies to student-loan debtors in certain circumstances.

Some in the media speculate whether the extraordinary amount of student-loan debt in this country could lead to another economic collapse. With about $1.2 trillion in total student loans, the aggregate student-loan debt continues to rise at a rate of about $2,726 every second, according to MarketWatch in January 2016.

MarketWatch also reports that about 40 million Americans have student-loan debt, with almost three-quarters of all college students graduating with it. This financial burden is undoubtedly preventing young adults from starting their economic lives. Instead of purchasing their first homes and automobiles, they are renting apartments or living with their parents so they can afford to make student-loan payments.

FDCPA requirements

Unfortunately, many struggle on starting salaries to make their student-loan payments, paying them late or not at all. The good news is that the main federal consumer-protection law for debtors, the Fair Debt Collection Practices Act or FDCPA, limits the actions of debt collectors seeking to collect student-loan debt.

The FDCPA forbids, among other things, “false, deceptive, or misleading representation” in debt collection concerning the “character, amount, or legal status” of the debt and “false representation or deceptive means” to collect a debt. In addition, a debt collector may not use “unfair or unconscionable means” in an attempt to collect a debt.

Description of rehabilitation and other rights

A Rehabilitation, under federal law, applies to certain federally guaranteed loans. Under a Rehabilitation, a student-loan debtor has the right, once during the repayment period of a loan, to rehabilitation a defaulted loan. This is accomplished by contacting the debt collector and requesting the rehabilitation. Once requested, the debt collector has the obligation to establish a temporary repayment plan (which is based on the student-loan debtor’s unique financial condition, and can be less than the regular monthly payments for the loan). If the student-loan debtor timely makes these payments for nine out of the next 10 months, then the debt collector is required to have the loan rehabilitated. This means that it would be taken out of default status, all prior credit reporting of the default would be removed, and the loan would be sold to a third party. The debt collector / new loan holder can add up to a 16 percent administrative fee to this new loan.

Unfortunately, the debt collectors rarely handle rehabilitation rights properly. For example, when a debt collector communicates with a student-loan debtor to initiate a wage garnishment, the collector’s communication must correctly describe rights under federal education laws of student-loan debtors behind in payments or facing default.

The FDCPA could be violated is if a debt collector does not correctly describe the rights of a student-loan debtor in this notice. The consumer may rely to his or her detriment on the collector’s inaccurate statement and miss deadlines or fail to pursue remedies that could have prevented wage garnishment or other collection methods. 

FDCPA remedies

If a debt collector violates the FDCPA, the victim may bring an individual lawsuit for actual damages plus additional damages up to $1,000. Alternatively, the victim may bring a class action lawsuit to assist not only themselves, but all other student-loan debtors who have been subjected to similar violations. To determine additional damages, the court will look at relevant factors including the “frequency and persistence of noncompliance,” the nature of the violation and whether it was intentional. The court may also order reimbursement of costs and legal fees.

FDCPA suits must be brought within one year of the date of violation, so anyone struggling with student-loan debt who suspects a debt collector of FDCPA violation should seek the advice of an attorney as soon as possible. In addition, legal counsel can advise the debtor of additional legal remedies that may be available, depending on the circumstances.

Attorney Thomas Breeden of Thomas R. Breeden, P.C., of Manassas, Virginia, represents clients throughout Northern Virginia and across the state in consumer-protection matters, including student-loan collections.