This Federal Lawsuit Has Left Defaulted Student Loan Borrowers in Limbo

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Right now, more than 91,000 people who defaulted on student loans are stuck in limbo.

The ones who were already working on making the nine on-time payments to get the loans out of default still have the money sitting uncollected in their bank accounts.

The newly defaulted have not been contacted so they can learn about the payment options that could get them back on track and save their credit scores.

If members of either group try reaching out to their servicers for answers, their calls and subsequent voicemails go unanswered.

It’s not clear when the issues will be resolved.

And while the problems are not the fault of the borrowers, they are on the hook for the consequences which can be as serious as going into default again, according to BuzzFeed News.

Wait, Why is This Happening?

A federal lawsuit is moving through the court system that involves the Department of Education and several student loan servicers, which believe their contracts were unfairly terminated under the Obama administration.

The judge on the case issued, then repeatedly renewed an order that stopped the government from assigning new default cases to new servicers, according to Politico. The purpose was to “maintain the status quo” until a resolution could be reached.

Shortly after the order was extended, the DOE told all servicers to stop work altogether, saying that the judge’s order effectively shut down its ability to operate the defaulted student loan collection program.

Now, we’re all losing.

Until the newly defaulted can begin their payment plans, taxpayers will lose about $640,000 each month, the DOE said.

And the consequences are pretty severe for individual borrowers, too.

According to court filings, the order “has created a service interruption that will likely cause significant harm to borrowers, including damaged credit, confusion, the accrual of unnecessary interest, and excessive wage garnishment,” BuzzFeed reported.

What’s Being Done to Fix This?

This problem is only affecting people whose loans are in default, most of whom only recently went into default. That’s just a tiny fraction of the 4 million people currently in default.

Unfortunately, an attorney with knowledge of the case also told BuzzFeed that “[there] is no fix in sight.”

Servicers say the DOE’s inability to reach a resolution, not the judge’s order, has stopped work and harmed borrowers. But the DOE says that was its only option.

For now, borrowers are stuck waiting.

Many have already called their servicers and left voicemails, with at least one filing a formal complaint after not hearing back.

Until a resolution is reached or the DOE finds a way to continue servicing while the court battle wages on, borrowers caught in the crosshairs seem to have very little recourse.

Of course, this is just the latest in what is beginning to seem like all bad news from the DOE.

We included some tips to help student loan borrowers learn to protect themselves after a recent memo from Education Secretary Betsy DeVos rolled back some borrower protections last month.

If you think you might be close to defaulting and want to fix things before it’s too late, read up on your options now.

Your Turn: Are you among the 91,000 affected by this lawsuit? What happened when you tried to reach your servicer or the Department of Education?

Desiree Stennett (@desi_stennett) is a staff writer at The Penny Hoarder.