MANDATORY ASSIGNMENT OF DEFAULTED FEDERAL PERKINS LOANS

Federal Student Aid recently issued updated guidance for schools to assign Defaulted Perkins Loans that have been in default for longer than two years to the Department.

Institutions will have through June 30, 2022 to either assign or purchase loans that have been in default for more than two years. If an institution determines that borrowers who have defaulted Perkins Loans are making payments, the institution may notify the Department that documentation showing an acceptable collection record is available upon request. If the documentation is requested and reviewed by the Department, the institution will be notified whether these loans are required to be assigned, purchased, or if the institution may continue collecting on these loans.

The Department plans to assess all active Perkins loan assignment activity to ensure that institutions are making sufficient effort to service their outstanding loans. To that end, they said that if an institution has shown insufficient effort assigning, purchasing, or providing acceptable collection records to the Department for review, a warning letter will be sent to the institution’s President, reminding them take action on these loans by the June 30, 2022 deadline.

Institutions must maintain documentation of their collection efforts for defaulted loans. According to the EA, schools that don’t maintain acceptable records, may be required to assign the loans to the Department “without recompense”. In the Department’s view, “the fact that a loan has been in default for more than two years suggests a lack of compliance with the collection procedure criteria established by regulation.” Thus, unless an institution can demonstrate with adequate documentation that they have tried to collect on a defaulted loan in accordance with the HEA’s requirements, they will be required to assign those loans to the Department.

Although institutions can now voluntarily assign Perkins loans, including those loans that have an acceptable collection record or are not in default, at any time, there are specific rules to follow when pursuing collection themselves.

If the institution, or the firm it engages, pursues collection activity for up to 12 months and is not successful in converting the account to regular repayment status, or the borrower does not qualify for deferment, postponement, or cancellation on the loan, the institution shall:  

• Litigate in accordance with the procedures in § 674.46;
• Make a second effort to collect the account as follows:
• If the institution first attempted to collect the account using its own personnel, it shall refer the account to a collection firm.
• If the institution first attempted to collect the account by using a collection firm, it shall either attempt to collect the account using institution personnel, or place the account with a different collection firm; or
• Submit the account for assignment to the Secretary in accordance with the procedures set forth in § 674.50.
• If an institution is unsuccessful in its efforts to place a loan in repayment after extensive collection efforts, it must continue to service the loan by making yearly attempts to collect from the borrower until the loan is
• recovered through litigation;
• assigned to the Department; or
• written off only if the outstanding principal, accrued interest, collection costs and late charges are within the allowable thresholds as prescribed under § 674.47(h) (loans with a balance of less than $25; or loans with a balance of less than $50 if the borrower has been billed for this balance for at least 2 years).