Archive for 'Student Loans'

Student Loans, Tragedy, and Forgiveness

Wednesday, May 1st, 2013 at 5:00 am  
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Understandably, parents often readily agree to cosign their child’s student loans for college. After all, who wouldn’t want their children to be able to attend college and achieve their goals. Unfortunately, some parents are in the tragic position of having student loan debt collectors come after them to repay cosigned student loans taken out by their deceased children. The New Jersey Star-Ledger reports about one such family, whose son died at the age of 30. When he died, he had $27,000 worth of loans, which Sallie Mae expected his parents to pay. The parents asked Sallie Mae to forgive the loan, but they refused. According to the news story, the Smart Option Student Loan program – which provides automatic loan forgiveness if the primary borrower dies – was launched in 2009, but this couple’s son had loans that were older.

U.S. Department of Education loans are forgiven if the borrower dies, as are parent PLUS loans. However, when a loan greater than $600 is forgiven, it is reported to the IRS and is considered taxable income. The report should be listed under the primary borrower’s social security number, but all too often it is sent under the cosigner’s social security number. If you receive the form by mistake (it’s called a Form 1099-C), you should ask the entity that issued the form to correct it.

CFPB Pushing Refinance Plan for Private Student Loans

Wednesday, March 6th, 2013 at 3:12 pm  
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The New York Federal Reserve reports that student loan debt is an enormous burden – $966 billion at the end of 2012. Moreover, that number is contributing to the lack of economic growth, evidenced by fewer borrowers buying homes. According to the Huffington Post, the Consumer Financial Protection Bureau is investigating ways in which it might be easier for those with private student loans to refinance, helping to reverse the domino effect that student loans have on the economy.

Here’s HuffPo’s interview with a CFPB representative:


Student Loan Debt Collectors Haul in Bonuses

Thursday, January 24th, 2013 at 1:56 pm  
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As we’ve often discussed, student loan debt collection is big business. Debt collection agencies covet Department of Education contracts, and the government has contracts with 17 large debt collection agencies and five small debt collection agencies. But there’s something wrong with the system. The Department of Education gives each student loan debt collection agency a score, and uses those scores to award quarterly and annual bonuses to the debt collection agencies. The scoring is weighted, giving debt collection agencies that collect the most money the biggest boost (70 out of 100 points). Only ten points are awarded for high performance in administrative resolutions. The remaining 20 points are awarded for total accounts serviced.

This point system and related bonuses don’t provide incentives for debt collectors to inform consumers about the federal programs that enable borrowers to obtain deferments and forbearance (see http://www.direct.ed.gov/postpone.html), or to participate in loan consolidation or in the “Pay as You Earn” program (see http://loanconsolidation.ed.gov/).

Debt collection industry publication InsideARM published the performance scores and amounts collected by student loan debt collection agencies for the quarter ending September 30, 2012. The amounts collected are astounding:

Pioneer Credit Recovery – $48.2 million
ConServe – $44 million
Van Ru Credit Corporation – $42.3 million
FMS Investment Corp – $41.6 million
NCO Group – $40.4 million
GC Services – $40.2 million
ERS – $37.7 million
Diversified Collection Services (Performant) – $37.1 million
Premiere Credit of North America – $35.4 million
Allied Interstate – $31.5 million
Progressive Financial Services – $30.7 million
EOS CCA (Collecto) – $30.5 million
Account Control Technology – $30.4 million
Windham Professionals – $29 million
Financial Asset Management Systems – $26.4 million
CBE Group – $24.7 million
West Asset Management – $20.3 million
Coast Professional – $21.9 million
Collection Technology – $17.8 million
National Recoveries – $13.5 million
Immediate Credit Recovery – $13.5 million
Delta Management Associates – $11.8 million

Pay as You Earn Student Loan Repayment Program Starts Today

Friday, December 21st, 2012 at 2:39 pm  
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We’ve often discussed the arrangement the U.S. Department of Education has with debt collection agencies to collect on federal student loans. A new repayment program starts today, December 21, that will enable former students to bypass debt collection agencies and avoid undue financial hardship.

According to a report in the Associated Press, the “Pay as You Earn” program calls for monthly payments equaling ten percent of discretionary income, and forgives loans after 20 years. While an estimated 1.6 million consumers are eligible to take advantage of the program, there are a few caveats. First, the loans must be federal loans (as opposed to private bank loans). Second, the loans must have originated after October 1, 2007 and borrowers must have received a disbursement after October 2011. For those borrowers who work in public service jobs, loan forgiveness occurs after ten years.

Federal Legislation May Put Student Loan Debt Collectors Out of Business

Wednesday, December 5th, 2012 at 5:00 am  
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When a debt collection agency is awarded a contract from the U.S. Department of Education to collect on student loan debt, it’s like hitting a gold mine. Student loan debt collection is literally a $1 billion a year business. If U.S. Rep. Tom Petri (R-WI) gets his way, though, that slice of the pie may disappear.

According to a report in Bloomberg, Petri is planning to introduce legislation that would bypass debt collectors and instead use automatic payroll deductions to recoup defaulted student loans. The amount deducted would be based upon the borrower’s income, and would avoid debt collection fees thank can add 25 percent to a person’s loan balance. The program would be administered by the Education Department and the IRS.

The legislation will seek to address the $1 trillion in outstanding student loans. Bypassing debt collection agencies is increasingly feasible, since the federal government now directly lends money to students. In addition, the bill would put a cap on the amount of interest that could be charged over the lifetime of a loan. Since the current session of Congress is coming to a close, the bill probably won’t be considered until next year.

A Peek into the Future of the Debt Collection Industry

Friday, October 19th, 2012 at 5:00 am  
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Debt collection industry publication InsideARM recently ran an article that bemoaned the downturn in delinquent credit card debt (a good trend for consumers, but a bad trend for debt collectors), and pondered where the debt collection industry could turn to find the next proverbial gold mine. Author Patrick Lunsford identified two areas where debt collection agencies could begin to rake in profits: defaulted student loans and healthcare debt.

Lunsford noted the Consumer Financial Protection Bureau’s report that there is about $1 trillion in outstanding student loans, and that the amount of student loans is on an upward trajectory. He postulates that one of the factors driving this trend is the collapse of home values. People can no longer take out second mortgages to finance college, and so are taking out student loans instead. He points out that, while 22 debt collection agencies contract with the Department of Education, those agencies subcontract. Plus, there is additional loan debt from for-profit colleges and private loans that aren’t connected to the Department of Education.

In the realm of healthcare, Lunsford notes that the primary debt collector trade group, ACA International, found that slightly over half of debt collection agency revenues come from medical debt collection. He goes on to extrapolate that $20 billion of healthcare debt per year is up for grabs.

One can’t help but wonder what would happen to the debt collection industry should proposed defaulted student loan reforms be enacted, and what the landscape will look like when healthcare reform (which should increase the number of insured and thus lower the number of people with runaway medical debt) is implemented.

A New Look at Student Loans

Thursday, September 27th, 2012 at 5:01 pm  
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In The Daily Beast, NYU Professor Andrew Ross takes a stance that should make college admissions officers, the federal government, and student loan debt collectors blanch. Essentially, he says that student loans are immoral, and that asking college students to leverage their future earnings for an opportunity to learn is akin to indentured servitude. He notes that, while there is much discussion of student loan debt, very little of that discussion takes place on college campuses. He also takes issue with the terms of student loans, pointing to loans’ inability to be discharged during bankruptcy proceedings, the high interest rates the government charges for student loans, and the tools that debt collectors have at their disposal (such as garnishment and clawing back tax refunds).

Last fall, Ross and others launched the Occupy Student Debt Campaign, which calls for the federal government to pay college tuition fees, zero-interest student loans, financial transparency at both public and private colleges, and wiping the slate clean for those that currently carry student loan debt. The Occupy Student Debt Campaign website has three petitions: one for those who owe student loans and pledge to stop paying them once the petition garners one million signatures; one for faculty members; and one for allies who don’t owe debt but who support the principles of the campaign.

While the idea of a federally-funded university education is anathema to many, Ross offers a chilling perspective. He writes, “On a rough estimate, it would only take $70 billion of the federal budget to cover the tuition costs at every two- and four-year public college. This happens to be the sum the Pentagon wastes annually in ‘unaccountable spending,’ according to a recent audit, a testimony to how skewed our national priorities have become.”

NYT Shines Light on Student Loan Debt Collection

Monday, September 10th, 2012 at 6:47 pm  
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Andrew Martin at the New York Times reports that, while debt collection agencies are rubbing their hands in glee at the defaulted student loan goldmine, there is zero incentive to help consumers who owe the debts rehabilitate their loans. Quoting a column from debt collection industry publication InsideARM, Martin highlighted the industry’s reaction to the $76 billion mountain of defaulted student loans: “It was lip-smacking.” Martin quotes another InsideARM article in which the writer called student loans a “new oil well.”

There are 23 debt collection agencies that are priming the pump. These agencies each have a piece of the student loan debt collection pie, and the federal government paid out $355 million last year to these debt collectors. At issue isn’t whether or not borrowers should repay their loans; at issue is a broken system where borrowers aren’t made aware of the programs available to make repayment manageable, and debt collectors who have no incentive to create a payment plan that works for consumers. As a result, the interest and penalties pile on, sometimes doubling or tripling the original loan amount.

Given that student loans generally aren’t dischargeable in bankruptcy, and given that the government is allowed to seize tax refunds and garnish wages of defaulted borrowers, it’s worth it to find a way to repay student loans. The government offers income-based repayment programs (payments are 15 percent of disposable income) and deferment programs. Unfortunately, debt collection agencies don’t have a financial incentive for shepherding borrowers into these programs. Under consideration are regulations that would force debt collectors to help those with student loans move into an affordable payment plan, that would lower required payments to 10 percent of disposable income, and that would enable borrowers to apply for the programs online. While this won’t solve everyone’s problems, it will help many more consumers who are in default and prevent the “lip-smacking” mentality of the debt collection industry.

Bloomberg Again Highlights Student Loan Debt Collection

Saturday, May 19th, 2012 at 5:00 am  
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After writing a trifecta of compelling reports on student loan debt collection practices, John Hechinger at Bloomberg is delving more deeply into another aspect of student loan debt collection, namely the compensation that those at guaranty agencies receive. Prior to 2010, a variety of lenders provided federal student loans (now only the federal government issues federal loans); guaranty agencies are nonprofit organizations that guaranteed payment of student loans should those borrowers go into default. There are 23 guaranty agencies; the one that Hechinger wrote about, Educational Credit Management Corp. (ECMC), guaranteed $35 billion in student loans in Virginia, Oregon, Connecticut, and California.

The financial incentives for those in the student loan and guaranty businesses are staggering. Hechinger repots that one of ECMC’s debt collectors earned $454,000 in a single year, and that the nonprofit’s CEO received $1.1 million in 2010. Although a collector’s salary ranges from $33,000 to $46,000, Hechinger points out that collection bonuses mean that a debt collector can earn 10 times as much. Those sitting on the organization’s board of directors can receive up to $90,000 per year.

According to ECMC’s agreement with the government, if another guaranty agency goes under, ECMC gets to scoop it up. However, nonprofit ECMC has used its revenues to purchase for-profit debt collection agencies, such as Premiere Credit of North America, reports Hechinger.

He also crunches the numbers so readers can understand why collection agencies are raking in the money on defaulted student loans. If a debt collection agency works to prevent a student loan default, they get one percent of the loan amount; if the agency gets a defaulted borrower to make nine payments in ten months, they get up to 37 percent of the loan amount. In other words, there is a strong financial incentive to focus on getting borrowers into default and then getting them to make payments.

The Impact of Student Loans

Tuesday, May 15th, 2012 at 12:34 pm  
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Lately, we’ve frequently posted about student loan debt collection, the financial incentives that the U.S. Department of Education provides to third-party debt collection agencies, and the impact that those incentives have those with student loan debt. Because of Department of Education’s compensation structure, student loan borrowers are often squeezed into making a minimum payment that is beyond their means, rather than given the opportunity to enter into a repayment program where the payments are aligned with their ability to pay.

The New York Times recently ran a story written by Andrew Martin and Andrew Lehren that delves into the real lives of real people who are struggling with student loan debt. Some interesting statistics emerged from their research. For example, the percentage of borrowers who earn a bachelor’s degree has soared from 45 percent in 1993 to 94 percent. In 2011, the average debt was $23,000. Total public student loans top out at $902 billion, with another $140 billion in private loans. A disproportionate number of borrowers are those who attend for-profit colleges…Although only 11 percent of students attend for-profits, these students constitute 25 percent of federal loans.

Add into the mix the increasing cost of college and the plummeting funding provided by states for public higher education, the reporters argue, and the result is akin to the housing bubble. Graduates are increasingly “underwater,” owing more in monthly student loan payments than they can reasonably hope to repay. The article says, “Nearly one in 10 borrowers who started repayment in 2009 defaulted within two years.”

The reporters use Ohio as an example of one issue that is mirrored in other states: as state spending on higher education lessens, prison spending is on the rise. In Ohio over the past 30 years, support for public colleges and universities was reduced form 17 percent of the budget to 11 percent, while spending for prisons has doubled from 4 percent to 8 percent.

For those who are facing the prospect of comparing costs and financial aid packages, the process is confusing at best and misleading at worst. Colleges and universities often present “financial aid packages” that include an assumption that the prospective student will take on tens of thousands of dollars of student loans. While it may appear as though the student is getting a free or low-cost education, he or she could take on enormous debt. This is particularly true if it takes the student more than four years to graduate – a phenomenon that’s on the upswing as universities are slashing staff and class sections, meaning that students are unable to register for classes required for their majors.

The Consumer Financial Protection Bureau, created by the Dodd-Frank Act, is working toward developing a standardized form that institutions can use to inform prospective students of the costs and loan burden associated with their financial aid packages. The CFPB is soliciting input for such a form, and you can voice your opinion here: http://www.consumerfinance.gov/students/knowbeforeyouowe/ The CFPB also has a beta version of a cost comparison worksheet (http://www.consumerfinance.gov/payingforcollege/costcomparison/), where you can enter the names of schools and universities and obtain a side-by-side comparison of the “sticker price” of a school, the average amount of grants and scholarships, and the estimated student loan amount and debt after school.

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