Annie Nova | CNBC
The proposed class action lawsuit, filed this week in federal court in Atlanta, said Education Secretary Linda McMahon and the largest credit rating companies are violating the Fair Credit Reporting Act — a federal law that, among other provisions, requires information in consumer credit reports to be accurate.
According to the lawsuit, the Trump administration reported federal student loan borrowers as late on their bills to credit rating agencies while being unable to enroll them in repayment plans or to provide them with sufficient consumer support. It said Equifax, Experian and TransUnion did not make sure the reported data was correct, leaving borrowers with damaged credit.
Wayne Johnson, the 2024 Republican nominee for Congress in Georgia’s 2nd district and a former chief operating officer at the Office of Federal Student Aid, is financially backing the class action effort.
Johnson told CNBC that it shouldn’t come as a surprise that a Republican is behind a lawsuit to make sure borrowers aren’t unfairly reported to the credit rating agencies.
“I want to stop damaging people and the economy,” Johnson said, and “I don’t want to piss off voters.”
More than 40 million Americans hold student loans. The Trump administration said in April that more than 5 million borrowers were in default, and more were at risk.
“This is a story about millions of responsible student loan borrowers who want to make payments but are unable to do so because of the lack of operational capabilities of the department,” Johnson said.
Equifax, Experian and Transunion did not immediately respond to requests for comment.
In an email, an Education Department spokesperson called the class action effort “an embittered attempt by ideologues” to change the administration’s efforts to get defaulted borrowers back into repayment.
Collection efforts have affected borrowers’ credit
The Trump administration restarted collection efforts on defaulted student loans in May, a move experts said has put millions of borrowers at risk of wage garnishment and lower credit scores.
A May analysis by TransUnion found that consumers who faced default in recent months saw their credit scores fall by 63 points, on average. For super prime borrowers — or those with credit scores above 780 — who were seriously delinquent, scores sank as much as 175 points. Credit scores typically range between 300 and 850.
Collection activity had been paused for roughly five years, a remainder of Covid-era policies meant to offer relief to borrowers.
Trump officials’ focus on recouping payments from defaulted student loan borrowers was a reversal of the Education Department’s strategy under former President Joe Biden, which centered more on providing borrowers with additional options to get current on their bills.
The collection activity also began shortly after the Trump administration terminated nearly half of the Education Department’s staff, including many of the people who assisted borrowers.
More than 1 million federal student loan borrowers are stuck in a backlog to enroll in repayment plans, according to court records from mid-September.
“The U.S. Department of Education has painted delinquent borrowers with a broad brush of hyperbole and threatened them with enforced collections, even though these borrowers have been unable to make payments,” said higher education expert Mark Kantrowitz.
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