Excerpted from last week’s press release:
Consumer Attorney Sergei Lemberg (www.stopcollector.com) applauded the U.S. Department of Education’s recent actions regarding student loan debt collection. Late last week, the Education Department said that it would mandate that debt collectors use an income-based formula in collecting payments on defaulted student loans, rather than a minimum payment based on the loan amount. The agency also indicated it would review debt collection scripts and the commission structure it uses with private debt collection agencies.
Lemberg said that these actions, which will likely take effect in mid-2013, will help offset economic conflicts of interest that cause debt collectors to violate the Fair Debt Collection Practices Act by threatening to garnish the wages of those with defaulted student loans. Lemberg said, “While the law says that a court judgment isn’t needed to garnish wages to repay federal student loans in default, the debt collection agency is required to provide the consumer with a notice of intent to garnish. We’re seeing a disturbing trend whereby debt collection agencies threaten consumers with garnishment if an immediate minimum payment isn’t made.”
In addition to sending the consumer a notice of intent to garnish, the law mandates that the person in default has a right to an impartial administrative hearing. “Several of our clients have been threatened with garnishment, without having been served a notice of intent nor having been informed of their right to an administrative hearing,” Lemberg said. “This is a clear violation of provisions of the Fair Debt Collection Practices Act that prohibit debt collectors from threatening actions that they neither have the ability nor intent to carry out.”
Indeed, some of Lemberg’s clients report that debt collectors have deceived them into supplying their financial information, ostensibly to be considered for a “hardship program,” and instead use the information to press for immediate payment. One client began receiving verbal garnishment threats from a debt collector in December 2011, and to date hasn’t received the legally required notice of intent to garnish.
According to Lemberg, the Department of Education’s current financial arrangements with private debt collection agencies create a situation ripe for abuse. “Debt collection agencies get a sizeable commission from each dollar they collect, while getting only an flat administrative fee for accounts on which they don’t collect,” he said. “Moreover, the Education Department gives each debt collection agency a quarterly ranking, and awards new accounts based on that ranking. Seventy percent of the ranking is based on dollars collected. There is zero incentive for debt collection agencies to help consumers enter a loan rehabilitation program that lowers their monthly payments.”
Lemberg goes so far as to propose that the Department of Education do a bit of borrowing of its own. “The Education Department should take a page from the IRS playbook,” he said, noting that – like back taxes – defaulted student loans aren’t dischargeable in bankruptcy. “The IRS had a disastrous experience with private debt collection agencies, and brought collections back in-house. Consumers with student loans shouldn’t be treated more poorly than those who owe back taxes.”