Tuesday, June 5, 2012

Student Loan Debt Collectors

According to a report from the National Consumer Law Center, “The U.S. Department of Education (the Department) relies on an increasing number of private contractors to collect the approximately $67 billion in defaulted federal student loan debt.” Moreover, not only is the government on the hook for an increasing number of student loan defaults, but it is paying outside collection agencies huge sums of money to collect these debts: “The Department paid contractors almost $1 billion in commissions in 2011.” Thus instead of providing free public higher education, the federal government is lending students huge amounts of money that they can never pay back, and the result is that the feds have to hire expensive private contractors to collect the cash.

One reason why the federal government spends so much on debt collectors is that these outside agencies receive bonuses for their aggressive handling of student debt: “using a metric called the Competitive Performance and Continuous Surveillance (CPCS) score. The percentage of dollars collected on federal student loan accounts determines the majority of a contractor’s CPCS score, with a maximum of 70 possible points. The second metric is Account Servicing Percentage which calculates the percent of federal student aid accounts awarded to the PCA that have activity as a result of the PCA’s efforts, either through litigation, an administrative resolution, or actual payments. The top performer for this metric will receive 20 points. Finally, PCAs may earn up to 10 points for their Administrative Resolution Percentage which tabulates how many federal student aid accounts the PCA referred back to the Department for a non‐cash administrative resolution (i.e. disability discharge, death of borrower, etc.).” In this system, outside agencies are given an incentive to harass students and force them to hand over all of their money to the collectors.

Furthermore, since these private agencies increase their earnings if they collect more from students, they do not pursue other forms of reconciliation, like writing down the principle or extending the payments. In fact, borrowers in default are subject to the government’s extraordinary collection powers that last a lifetime: “The collection agencies hold the keys to the borrower’s future because the government hires collection agencies not only to collect, but also to act as the front line “dispute resolution” entities for financially distressed borrowers.” In other words, the private collectors act as judge and jury, and they use the power of the national government to garnish wages and public benefits. This situation has gotten so bad that many people have had their social security checks garnished in order to pay back decades-old student loans. As a society, we have created a system of indentured student servitude as our tax dollars are used to pay profit-seeking loan collectors to further abuse former students.

Making matters worse, when people are late on their loan payments, they often are subjected to huge penalties that make it even harder for them to pay off their debt, which transforms them into prime targets for aggressive for-profit debt collectors. This problem will only worsen if Congress does not stop student loan interest rates from doubling next month.