The Debt Problem that Remains

While borrowers who have defaulted on their students loans might be eligible for reasonably modest repayment options under the Obama administration’s Income-Based Repayment (IBR) plan, it turns out lots of debt collectors are trying to get them to pay more.

According to an article by John Hechinger at Bloomberg News:

The Education Department is turning to an army of private debt-collection companies to put the squeeze on borrowers. Working on commissions that totaled about $1 billion last year, these government contractors face growing complaints that they are violating federal laws by insisting on stiff payments, even when borrowers’ incomes make them eligible for leniency.

Education Department contracts — featuring commissions of as much as 20 percent of recoveries — encourage collectors to insist on high payments. Former debt collectors said they worked in a “boiler-room” environment, where they could earn bonuses of thousands of dollars a month, restaurant gift cards and even trips to foreign resorts if they collected enough from borrowers.

The person profiled in the article, who earned $20,000 a year and suffered from liver disease, was told by Pioneer Credit Recovery that he had to pay the company $219 a month to service his defaulted student loans. The IBR policy actually required him to pay about $50 a month.

Some $67 billion worth of student loans are now in default.

Apparently by contracting its duties out to debt-collection companies the Education Department was about to recover $11 billion in defaulted loans last year.

Companies collecting on defaulted student loans earned about $1 billion in commission last year.

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Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer