Senators Dick Durbin (D-IL), Tom Harkin (D-IA) and Al Franken (D-MN) have introduced the Fairness for Struggling Students Act of 2013. According to a press release issued by Senator Durbin, the bill seeks to reverse a 2005 change to bankruptcy laws that prevented private student loans from being discharged in bankruptcy proceedings. While government issued or government guaranteed student loans have long been protected in a bankruptcy, meaning that bankrupt borrowers were still responsible for repayment, until 2005 private student loans were treated like other types of debt. According to Durbin’s office, “In 2005, the law was unjustifiably changed to give private student loans the same privileged bankruptcy treatment as government loans, even though private student loans have vastly different terms and fewer consumer protections.”
According to the Huffington Post, among those organizations that support the bill are the American Association of University Women, the Consumer Financial Protection Bureau, the U.S. Department of Education, and Sallie Mae.
The bill was introduced in the previous Congress, but failed to pass out of committee.
According to a report in the New York Law Journal, a “once in a blue moon” phenomena occurred: a bankruptcy judge discharged a student loan debt. Typically, student loans aren’t dischargeable in bankruptcy proceedings. In this case however, a 64-year-old woman took out $16,900 worth of student loans a quarter of a century ago, but was never able to complete her education because she had to care for her ill parents. The judge found that the consumer, who had been laid off from an $11 per hour assembly line job, would never be able to repay student loan debt, which with interest totaled over $56,000, and discharged it in bankruptcy.
The National Consumer Law Center (NCLC) has issued a report entitled, “Borrowers on Hold: Student Loan Collection Agency Complaints Systems Need Massive Improvement.” Student loan debt collection has made headlines over the past few months, with the media shining a spotlight on the financial incentives that the U.S. Department of Education dangles in front of the third party debt collection agencies with which it contracts. These financial incentives are such that it’s worth more to a debt collector to try and force a consumer to make minimum monthly payments on student debt than it is for the debt collector to inform consumers about the loan modification and payment reduction programs that are available. In fact, the NCLC report goes so far as to say, “…the reality is that the Department has consistently favored collection agency profits over the needs of struggling borrowers.”
The report notes that complaints against student loan debt collectors are on the rise, even as they remain underreported, and that the Education Department has not used its considerable leverage to hitch compensation (or the awarding of contracts) to the number of complaints an agency receives.
While the Department of Education has clear standards and procedures for student loan debt collection agencies to implement regarding borrower complaints, the NCLC found that compliance with these policies was lacking. And while debt collection agencies do not make it easy for borrowers to complain, neither does the Department of Education. The NCLC found that “Borrowers must click through five web pages to learn how to complain about [debt collection agencies] and gather the Department’s contact information to submit their complaint.”
The NCLC developed five recommendations, including that the Education Department should develop an accessible collection agency complaint system, that the Department should change its commission system to reward good service, and that the Department provide financial incentives to agencies who have transparent and responsive complaint systems.
According to a report in the Washington Post, President Barack Obama is touring college campuses in an attempt to drum up support for a Congressional extension of lower interest rates for Stafford student loans. If Congress doesn’t act prior to July 1, Stafford student loan rates will double, to 6.8 percent. It’s estimated that this will tack on about $1,000 to the average student’s debt.
Student loan debt collection has been making headlines recently; one result is that the Department of Education is reexamining how third party debt collectors are utilized and remunerated.
President Obama promoted the Stafford student loan interest extension in an amusing appearance on “Late Night with Jimmy Fallon”:
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.”
Over the past week, there has been a firestorm over student loan debt collection. Bloomberg ignited the blaze with its story, “Obama Relies on Debt Collectors Profiting From Student Loan Woe,” in which it pulled the curtain back on the unsavory practices of some debt collection agencies. It also touched upon the inherent conflicts of interest involved when private debt collectors are given financial incentives to collect the greatest number of dollars possible – rather than help borrowers who have defaulted on student loans a path toward making affordable repayments and rehabilitating their credit in the process.
Not surprisingly, the fallout from this story caused Congressional Republicans to demand an investigation of the Department of Education by the Government Accountability Office. Another Bloomberg article cited Republican criticism of the Obama administration’s decision to pull all student loans under the federal government’s umbrella and charges of program mismanagement as fueling the call for the probe.
At the end of last week, a third Bloomberg article reported that the Department of Education had reached a decision on a rule proposed a year ago which would mandate that debt collectors allow those with defaulted student loans make minimum payments based on their ability to pay, rather than the actual loan amount. Moreover, the Education Department indicated that it would review debt collection scripts and that it would revisit the commission structure it uses with private debt collection agency. In our opinion, it’s about time.
Kudos to John Hechinger at Bloomberg for highlighting this issue and following up with it as events unfold.
USA Today reports that, according to the Federal Reserve Bank of New York, Americans’ debt for student loans exceeds that of credit cards. While Americans as a whole have steadily reduced their credit card debt since the 2008 financial crisis, an undergraduate student is taking on an average of close to $5,000 per year in student loans. According to the article, those who have matriculated are defaulting in record numbers. In 2009, the latest year for which statistics are available, 8.8% of loans were in default.
Student loan debt doesn’t go away. These debts are exempt from bankruptcy discharges. The federal government, which has massive student loan guarantee programs, engages the services of third-party debt collectors to collect on past due student loans. While modification programs are available, the government can – and will – collect via withholding tax refunds, garnishing wages, and so on.
In fact, some in the debt collection industry are calling student loans “The ARM industry’s new oil well.” They’re cheerleaders for defaulted student loans, because in 2013 the U.S. Department of Education will award highly coveted contracts to debt collectors.
The bottom line? Student loan debt has tremendous implications for unemployed recent graduates, who often have to put various aspects of their lives on hold (getting married, buying a home, having children) in order to spend years working to pay down their debt. It’s revolting that those in the debt collection industry are rubbing their hands in greedy anticipation of reaping profits from shattered dreams.
The Los Angeles Times recently reported that the statistics on student loan defaults don’t tell the whole story. Indeed, a study by the Institute of Higher Education Policy revealed that 26 percent of those with student loans are unable to make full monthly payments but are not in default. The impact on borrowers is significant, as late or incomplete payments can mean higher interest rates for other types of credit, including car loans and mortgages.
The Times also reported that, generally, students are taking on an increasing amount of debt. The story cites a U.S. Department of Education report stating that, upon graduation, fewer than half of students were in debt in 1993. By 2008, 66% of students were in debt. Moreover, the average amount of debt had increased by almost $5,000.
The Department of Education contracts with third-party debt collectors to collect on defaulted loans. Unlike with other types of consumer debt, the government can easily garnish wages, withhold tax refunds, and tack on debt collection fees. If you have a student loan and are having difficulty making payments, you should know that there are several options available to defer payment or to modify the repayment terms. In addition, if you’re in default and are experiencing financial hardship, you may be able to dispute your student loan.
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