Unpaid student loan splits 7th Circuit

A 7th Circuit Court of Appeals panel has split with each judge writing a separate opinion about a lawsuit brought by a student who defaulted on her school loans and then sued when the lending agency tacked on collection costs.

Bryana Bible was found to be in default on her student loan in 2012. The lending bank transferred the debt to USA Funds which provided Bible with options for repayment. Bible and her attorney negotiated a loan rehabilitation agreement which set the total amount due at $18,112.85 and required Bible to make monthly payments of $50. The agreement indicated there was no “current collection cost balance.”

Subsequently, USA Funds assessed $4,547.44 in collection costs against Bible. It had applied her monthly payments toward the collection costs rather than the principal.

Bible filed a complaint alleging, in part, breach of contract. The U.S. District Court for the Southern District of Indiana dismissed the lawsuit, but the 7th Circuit reversed and remanded for further proceedings.

Before the 7th Circuit, Bible argued she timely entered into a repayment agreement and complied with the terms. Therefore,  federal regulation prohibited USA Funds from assessing collection costs.

USA Funds pointed to language in the Federal Stafford Loan Master Promissory Note that allows the loan holder to impose “reasonable collection fees and costs, plus court costs and attorney fees.”   

Judge David Hamilton, writing the majority’s opinion, agreed with Bible. He described the regulations as providing a “safe harbor” for borrowers. Only if the borrower does not take action within the 60-day window can the guaranty agency take collection actions, report the default to consumer reporting agencies and assess collection costs against the borrower.

Judge Joel Flaum wrote a concurring opinion but differed with Hamilton on the collection costs. He did not agree that the text of the regulations unambiguously supported Bible’s interpretation of the statutory and regulatory scheme.

Meanwhile, Judge Daniel Manion dissented, calling Bible’s interpretation her own contrivance. He echoed Flaum in highlighting the differences between a repayment agreement and a rehabilitation agreement.

Bible entered into a loan rehabilitation agreement with USA Funds. This agreement established a new repayment schedule and her default was erased from her credit report. Also, costs would be assessed although they were capped at 18.5 percent of her outstanding balance.  

“Bible’s theory is contrary to the plain language of the statutes and regulations because nowhere do the statutes and regulations contemplate that “reasonable costs” equals “no costs” for borrowers who timely enter into a rehabilitation agreement,” Manion wrote.

The case is Bryana Bible v. United Student Aid Funds, Inc., 14-1806.