Student loans: $40 million of wages garnished from borrowers recently despite pandemic pause, data shows

About $40 million in wages were garnished from certain student loan borrowers' paychecks in May and June 2021 despite the Education Department (ED) prohibiting wage garnishment amid the ongoing pandemic student loan payment pause, according to newly published federal data.

The data, obtained through a freedom of information request by D.C.-based advocacy group Student Borrower Protection Center (SBPC), revealed that guaranty agencies — state or private non-profit agencies that help administer the Federal Family Education Loan Program (FFELP) — had seized $27.2 million in May 2021 and $12.9 million in June 2021.

"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," the SBPC stated in a blog post. "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."

Guaranty agencies insured FFELP loans made by banks and other private creditors. When a FFELP borrower defaults, a guaranty agency repays the loan and then pursues debt collection. In late March, ED halted interest and debt collection on about 1.14 million defaulted FFELP loans.

Furthermore, the ED's order was retroactive to March 13, 2020, meaning that borrowers who had had their wages garnished, tax refunds seized, or have made payments since then would be able to get a refund. 

"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," the SBPC stated.

It's unclear how many borrowers were affected or how much has been refunded. (One guaranty agency told MarketWatch that garnished wages were refunded to borrowers.) ED did not respond to a request for comment from Yahoo Finance.

"The fact that any borrowers were subject to wage garnishment during the pandemic is morally unjustifiable," Persis Yu, director of the student loan borrower assistance project at the National Consumer Law Center, told Yahoo Finance. "This is just another reminder of how broken our student loan collection system is and how we continue to fail borrowers with Family Federal Education Loans. These companies need to be held accountable and these borrowers need immediate relief."

A similar issue arose earlier in the pandemic: Consumer advocates sued then-Education Secretary Betsy DeVos in May 2020 for ED's failure to stop wage garnishment of borrowers for their federally-backed student loan despite an ED order. And while most of that money has since been returned, the Washington Post recently reported that nearly 11,000 borrowers are currently waiting on refunds of their garnished wages.

Yu asserted that "we need to ensure that all [FFELP] borrowers are able to get the same protections as their [federally-backed] Direct Loan peers."

FFELP is a student loan relic

FFELP loans are one of the most complicated types of student loans.

Created in 1965 as part of the Higher Education Act, the FFELP was created to help Americans pursue higher education. Banks and private entities administered the loans, which were guaranteed by the federal government. Banks would then securitize those loans as Student Loan Asset Backed Securities (SLABS) to sell to other investors. Just like the mortgages that were repackaged, SLABS were based on debt repaid by borrowers.

In October 2011, in the wake of the Global Financial Crisis, President Obama signed an executive order ending FFELP and moved most student lending to the government.

Borrowers with FFELP loans were encouraged to convert their commercially-held loans into federal ones so that the federal Direct Loan program would replace FFELP as the backer.

Millions of the FFEL borrowers stayed in private lenders' hands, however. The SBPC estimates that six million borrowers owe more than $154 billion in "commercial FFELP loans." Out of this pool, only defaulted FFEL borrowers have been able to benefit from the pandemic payment pause.

Amid the complexity, the SBPC's data shows, the U.S. government machinery was unable to properly oversee the guaranty agencies who service the remaining FFELP loans.

"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," the SBPC stated, later adding: "But that was more than half a decade ago—and these massive companies still have a bewilderingly large presence in the student loan landscape."

Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected] Follow her on Twitter @aarthiswami.

Read more:

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  • Data highlights the difference in perceived and actual value of a college degree in America

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