By now, most people have heard about the staggering amount of debt that the average college grad is carrying, but many may not be familiar with the means by which lenders, even the U.S. government, use to get students to pay back those debts.
As more students than ever are defaulting on loans in the wake of the economic downturn, the government has taken action, recruiting scores of debt collection companies to get borrowers to repay their debts. While there is little debate that borrowers can and should be making payments on their debts, the coercion, misrepresentation, and other aggressive tactics that these collectors take (some of which may even be illegal) have gotten many asking the Department of Education to make some serious reforms in how they collect on debts. Here, we showcase some of the saddest statistics and facts about student loan debt collection as it stands today, from the number of students who are in financial trouble to the highly questionable commissions paid to debt collectors.
- There is no way to escape student loan debt.
While changes to some laws may be on the horizon, at present, student debt is virtually inescapable. It cannot be discharged in bankruptcy and as there is no statute of limitations on the debt, it sticks around as long as you do unless it is paid off. It has always been incredibly difficult, if not downright impossible, to discharge federal student loan debt, but reforms to bankruptcy laws in 2005 also made it difficult to discharge private loan debt. While federal loan debt may be troubling, private loans are where debt-ridden students often get in trouble, as private lenders do not offer the sometimes generous repayment options, loan forgiveness, and low rates that federal lenders do. Yet both types of loans have proved troublesome to students in recent years, as the government has taken increasingly aggressive measures to get borrowers to pay up.
- Nearly one in every six borrowers with a loan balance is in default.
Sadly, the number of students who are already or will have to deal with debt collection on their student loans isn’t insignificant. Over the past five years, as the economic downturn has heavily impacted college grads, the number of debtors who are at least 12 months behind in paying their student loans has risen more than a third. Currently, one in six federal student loans is in default, adding up to more than $76 billion in loans that aren’t being paid. Even those who don’t default often struggle: a 2011 study found that two out of five borrowers were delinquent at some time during the first five years they were repaying their loans.
- Last year, the U.S. Department of Education spent over $1.4 billion to hire collection agencies to hunt down these defaulters.
Despite the fact that unemployment for new grads is at record highs, the government is working harder than ever to recoup money from individuals who have defaulted on their loans. While those who owe should have to make good on their agreements, many simply don’t have the funds to do so, ‘choosing’ to pay for rent and food over their student loans.
- Government debt collectors can seize almost any kind of asset.
Perhaps one of the scariest aspects of government debt collection is the tools it can use to recoup debts, far beyond what any private lenders have at their disposal. The federal government can seize tax refunds, garnish paychecks, and even tap into Social Security payments. Even worse, these tactics can affect others besides the debtor, as joint tax returns and social security benefits of co-signers are all fair game for the government.
- In 2011, the government recouped more than $2.67 billion using these methods.
If you think that seizures and garnishments are uncommon, then think again. Last year, the government collected $1.65 billion in loan debt through seizures of government checks and another $1.01 billion through wage garnishment.
- High recovery rates have meant that less is done to prevent default.
The rather intensive methods the government uses to get its money allow it to recoup 80 cents for every dollar that’s owed (though some studies suggest that the rate could be closer to 50 cents on the dollar), much higher than the private lender average of 20 cents per dollar. Critics point to this as a reason that the government often doesn’t do much to help debtors from going into default in the first place. Since the government knows it will recoup a high percentage of its money one way or another, there’s little incentive to expend resources to help borrowers avoid collections.
- Penalties on loan defaults can be as high as 25% of the balance.
The loans that many students carry are already staggeringly high, but not paying the loans can make things even more financially dire. In some cases, penalties, interest, and debt collection charges can add up to as much as 25% of the balance of the original loan. These kinds of penalties can make it even harder for debtors to pay off student loans, adding thousands more to the balance.
- Debt collectors hired by the government rarely explain the options debtors have for repayments.
Those struggling to pay back their student loans do have options that can make it possible to repay them without extreme measures like wage garnishment, but debt collectors aren’t likely to tell debtors about them. Many are unaware that they can make loan payments based on their income through a new government program. In fact, the program has had considerably less participation than expected, an outcome that many blame on the government resorting to hiring debt collection agencies rather than working with debtors to find mutually beneficial solutions. There are other ways to avoid defaulting, too, like forbearance and a variety of deferrment programs. Yet, the programs can’t help those who don’t know about them, and many who’ve already fallen behind on their loan payments are unaware that these options even exist.
- Debt collectors are rewarded for collecting as much of the money owed as possible regardless of the hardship that causes debtors.
Debt collectors aren’t likely to explain ways for borrowers to avoid default or to better manage their debt quite simply because it isn’t in their best interest. Employees of debt collection agencies are offered bonuses, gift cards, and trips for collecting given quotas from borrowers, making it highly unlikely that any of these individuals would suggest methods for lowering the monthly payments owed to the government. What’s worse, some use illegal methods to convince borrowers that a minimum monthly payment is their only option, violating both federal aid and debt collection laws.
- Collection agencies have little incentive to change because many receive huge commissions.
Government contracts and Education Department data showed that in 2011, collection agencies working for the government earned about $1 billion in commissions. Some agencies earn as much as 16% of the entire loan amount for rehabilitating a loan, a reward that’s only earned by getting borrowers to repay a minimum of .75% to 1.25% of the loan each month. It’s easy to see how this structure could result in misleading practices. In some cases the commissions for loan debt collectors have gotten wildly out of control, with some earning as much as $450,000 a year in bonuses. In light of recent criticism, the Education Department is considering changing the commission structure in its contracts, but for now, it’s still a factor that motivates many debt collectors to do anything and everything they can to ensure borrowers pay amounts that will earn them big bonuses.
- Student loan collection contracts are gold mines for collection agencies.
Debt collection agencies have pounced on the opportunity to work with the government. Some have doubled in size and are thriving, even amid the poor economy, through government contracts that reward them generously. Last year, the Department of Education paid 23 private debt collection agencies more than $355 million, which, according to some experts, has made contracts with the government the most sought-after within the debt collection industry.
- The average defaulted loan is worth about $17,000.
That’s not a huge amount, but it can be hefty for those who don’t have jobs and nearly insurmountable for those with health problems or who have disabilities that keep them from working. Other factors besides health and income play into who will default as well, as students who attend for-profit colleges are twice as likely to default and those who drop out of school are four times as likely to default.
- If a debt collector hasn’t found a defaulting borrower in six months, the case gets passed on to another agency.
The government doesn’t give up easily when it comes to tracking down those who owe student loan debt. If an agency working for the government can’t find the borrower and get them to make payments, they simply switch the case to another who can. Critics say this encourages collection techniques that are especially aggressive and that sometimes border on being unlawful.
- Debt collectors are the subject of thousands of complaints every year.
Debt collectors are the subject of more complaints to the FTC than any other industry. Recently, three agencies working with the Education Department settled out of court in response to allegations of abusive debt collections. In 2011 alone, the Department of Education received 1,406 complaints against the debt collectors it employs, up 42% from the year before.
- Loan collections have increased by 18%.
The methods the government uses to get borrowers to pay on their loans seem to be working, even if the debt collection agencies that carry them out aren’t providing the best service to borrowers. Collections in 2011 were 18% higher than the previous year, totaling about $12 billion.