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US looks to limit fees when students default

Northeastern head urges changes

The US Department of Education is planning to propose limits early next year on how much universities can charge former students in collection fees if they default on government loans.

At Northeastern University, President Joseph Aoun has asked a prominent alumnus, former Suffolk district attorney Ralph C. Martin II , to recommend changes to the school's debt collection practices after a Globe report last month that the university has charged fees as high as 66 percent of the original debt.

Northeastern should "consider ways to insure compliance with financial obligations that are consistent with our values as a university and a community," Aoun wrote to faculty and students earlier this month in announcing the review. "To my mind that means we treat one another with respect and dignity."

The Globe reported that colleges routinely charge debtors collection fees between 33 percent and 50 percent of the original balance on loans or unpaid tuition. In contrast, people with other types of debts, including on credit cards, generally pay much smaller collection fees, or none at all.

Some advocates for students, specialists on consumer debt, and university administrators called the fees at many colleges excessive and unreasonable.

The Department of Education caps collection fees at 25 percent for the loans that it administers. But one of the major federal programs, the Perkins loan, which gives at least $1 billion each year to low-income students, is administered by universities, which set their own collection fees.

Under the Perkins program, schools are required to charge defaulted borrowers all "reasonable" collection costs incurred by the institution, but the regulations do not spell out what is reasonable.

"The good government approach here is that we should specify or define what reasonable collections costs are," said Dan Madzelan , director of forecasting and policy analysis in the office of postsecondary education.

The department's ombudsman's office, Secretary of Education Margaret Spellings , and members of Congress have all received complaints about schools charging high collection fees, Madzelan said.

The department hopes to publish a formal proposal around May 1, seek public comment and then have the new policy in place by Nov. 1, officials said. It will create the rules in concert with representatives from universities, student and consumer groups, and loan companies. If new rules are approved, they would be binding. Although the changes would apply only to Perkins loans, schools usually follow the Perkins guidelines for other loans they administer.

Elizabeth Reardon , collection officer at the University of Massachusetts at Amherst, praised the plan to establish limits.

"When the department gets involved, schools often sit up and take notice," Reardon said.

She said the department of education's move will probably prompt universities to change their policies even before new limits go into effect, so that schools will appear proactive.

UMass, which already had lower fees than most schools, recently put its collections out to bid to try to lower costs even more, Reardon said. The new collection fees range from about 21 percent to 33 percent, rather than up to 35 percent.

College officials in the Globe report defended their collection efforts as a last resort after students failed to respond to efforts to negotiate a deal. They say that they make no profit on the fees, and need to charge as much as they do in order to balance their budgets and to replenish loan funds so other students can borrow.

Department of Education officials say their collection costs are lower than the colleges' because they have powers, including wage garnishment, that schools lack.

Northeastern had the highest collection fees of any school examined by the Globe.

Aoun said last night that he chose Martin to conduct the review because of his integrity and his love for Northeastern. Martin earned a Northeastern law degree in 1978.

Aoun refused to say whether he thought Northeastern's collection practices were unreasonable, because he didn't want to prejudge Martin's work. He said Martin's findings, stripped of confidential information about specific students, would be made public.

Aoun asked Martin, now a partner at Bingham McCutchen , to report back by March 1.

Marcella Bombardieri can be reached at bombardieri@globe.com.

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