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Change by government could allow student loan defaulters to be hit with big fees

Around 7 million Americans with student loans are affected by the decision.

The Department of Education recently reversed a federal policy that protected struggling graduates who fell behind on their student loan repayments from being hit with fees.

The Obama administration issued the guidance in 2015, which stipulated that companies who administer Federal Family Education Loans (FFEL) can not penalize people who have gone into default – provided they enter the government's loan rehabilitation program within 60 days of defaulting.

But the reversal approved last Friday brings an end to that 60-day protection. That means anyone with a FFEL loan who falls behind on their payments can be hit with fees of up to 16 percent on the cost of their loan and accrued interest, even if they have signed up for a federal repayment plan.

The Trump administration made the change because it thinks the Obama government was too quick to implement the restriction, saying the decision "would have benefited from public input."

As such, the department won't demand compliance from loan guarantors until it has had the opportunity to gather public comment.

The move has been condemned by the Consumer Federation of America, which just last week revealed a 14 percent rise in student loan defaults over the past year, with 1.1 million student loans in default in 2016 at a value of $137.4 billion.

"The Administration’s first move on the student loan default crisis will do nothing to stop the tidal wave of defaults that is sweeping across the nation," said Rohit Chopra, Consumer Federation of America senior fellow. "With more than 3,000 Americans defaulting on a student loan every day, this just adds insult to injury."

Who will this affect?

The Federal Family Education Loans Program issued federal loans made by private companies that were insured by guaranty agencies, FederalStudentAid notes.

The last of these loans was issued in June 2010, after which the Department of Education assumed control of doling out the federal student loans.

As such, anyone who took out a student loan on or after July 1, 2010, won't be affected by this change, as they won't have FFEL loans.

However, the Washington Post reports that around 7 million Americans have FFEL loans worth $162 billion held by guaranty agencies, so they could be hit with heavy penalties if they fall behind on their payments.

A student loan is considered in default after nine months of missed payments.

The original Obama edict came after a circuit court of appeals asked for a guidance in a case involving a graduate who took United Student Aid Funds to court. She was charged $4,547 for a loan she defaulted on in 2012 but was trying to pay back through a government program.

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