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Obama Plans Overhaul of Student-Loan Debt Collector Practices

The Obama administration proposed requiring that debt collectors let student-loan borrowers make payments based on what they can afford, rather than on the size of their debt.

The U.S. Education Department, which hires private collectors, said yesterday it would mandate that the companies use a standard form to gather debtors’ income and expenses. If borrowers protest, they would be offered an income-based formula, which can result in payments as low as $50 a month for an unmarried person with $20,000 in income and $20,000 in loans.

The collection companies -- which receive commissions of as much as 20 percent of recoveries -- are facing complaints that they insist on stiff payments from defaulted borrowers even though the Obama administration and Congress have approved more- lenient plans, Bloomberg News reported March 26. The education department is also reviewing the commissions it pays collectors.

“We definitely feel a sense of urgency to make sure we are doing everything we can to serve the interests of taxpayers and students,” Justin Hamilton, an Education Department spokesman, said in a telephone interview.

The agency first proposed changing the rule governing the treatment of defaulted borrowers a year ago, Hamilton said. After a public comment period, the regulation may take effect as soon as July 2013.

More Favorable

The final proposal, worked out yesterday in discussions with negotiators representing the government, industry and borrowers, was more favorable to the debtors than what the agency originally suggested, according to Deanne Loonin, an attorney with the National Consumer Law Center in Boston.

In particular, for students seeking to “rehabilitate” their loans in default, the proposed rule prohibits basing payments on a borrower’s loan amount, which has been standard practice for collectors, Loonin said in a telephone interview. Current government contracts provide what are among the biggest incentives to debt collectors that extract minimum payments based on loan amounts.

“This regulation is a really important step toward treating very vulnerable borrowers consistently and fairly and giving them the second chance they are entitled to by law,” said Loonin, who represented borrowers in the negotiations.

‘Best Information’

Along with examining incentive payments in borrower contracts, the department is looking at collector scripts and “making sure they’re giving people the best information available,” Secretary of Education Arne Duncan said in an interview on March 28, after testifying about the agency’s budget before a House panel.

With $67 billion of student loans in default, the Education Department hires 23 private debt-collection companies to chase borrowers. The contractors include Pioneer Credit Recovery, a unit of SLM Corp. (SLM), the largest student-loan company, known as Sallie Mae.

Companies that collect student loans directly for the department and through state agencies received about $1 billion in commissions last year, according to a review of contracts and agency data.

Sallie Mae, based in Newark, Delaware, will abide by any changes from the Education Department, said Patricia Nash Christel, a spokeswoman.

“We’re proud to offer programs that give consumers the opportunity to improve their credit and provide cost savings for the American taxpayer,” Christel said in an e-mail.

In 2009, Congress expanded a program that lets lower-income borrowers tie payments to their incomes. Debtors pay on a sliding scale tied to their debt, salaries and family obligations.

In October, Obama proposed making payments even lower and forgiving loans after two decades for some borrowers, a change that could take effect as soon as this year.

To contact the reporter on this story: John Hechinger in Boston at jhechinger@bloomberg.net

To contact the editor responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net

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