As the total of student loan debt in America hovers above one trillion dollars, and the amount of defaulted loans reaches $76 billion, the Accounts Receivable Management (ARM) industry is eagerly waiting to swoop down on the 5.9 million students and former students who are at least 12 months behind in making their payments.
And why not? Last year, the U.S. Department of Education (DOE) paid out more than $1.4 billion to collection agencies in order to recover owed monies – $355 million to 23 private debt collectors and $1.06 billion to the guarantee agencies that used to collect on defaulted loans made before 2010, when Congress revamped the system by transferring federal student loans from private lenders to the government, itself.
So you can see that a federal contract for going after student loan defaulters is akin to being granted the right to sink an oil well into vast and proven reserves.
Especially since the DOE’s rate of retrieval is so impressive – 80 cents for every dollar that goes into default. That’s because the feds, and by extension, anyone to whom the DOE has contracted to hunt down deadbeats, have extraordinary tools for collection – tax refunds can be seized, paychecks can be garnished, Social Security payments can be withheld.
Also, unlike credit cards, mortgages and other kinds of consumer debts, student loans cannot be mitigated through bankruptcy. And there is no statute of limitations on federally guaranteed student loans.
Not Even Death Stops Collections
Even death doesn’t seem to deter the collectors. Brittani Norris was 22 years old when she died in an automobile accident in 2009. For the next three years, Citibank dunned her grieving parents, demanding repayment for Brittani’s student loans.
In 2011, the average default amount was about $17,000. Half of all defaulters attended profit-making schools, although they only made up a little over 10 percent of attendees. Dropouts were four times as likely to default on their loans as graduates. Default can ruin one’s credit rating and add penalties up to 25 percent of a loan’s balance.
And although there are many programs to help debtors keep up with their payments, including income-based repayment, forbearance for temporary financial problems, and deferments for unemployment, military service and economic hardship, too many borrowers are unaware of their options.
In addition, the guarantee agencies have little incentive to prevent a borrower from defaulting, since they actually make more money for collecting or rehabilitating a defaulted loan, than they do for averting default in the first place. And debt collectors only get paid for what they bring in, not for what they charge-off.
The government is attempting make changes that are aimed at reducing the default rate and providing some relief to borrowers.
DOE: We Will Do Better
The DOE is promising to do a better job of publicizing things like income-based repayment plans that allow borrowers with a lot of debt but modest incomes to repay a fixed percentage of their salaries over a longer period of time, and under proposed regulations, debt collectors would have to offer borrowers affordable payment options.
Meanwhile, student debtors need to understand their rights under the Fair Debt Collection Practices Act, which protects them against abusive practices by debt collectors, and become better informed about the different repayment options available to them under the law. It’s their only defense against the predators of the ARM industry who only see geysers of profit just waiting to gush.