Previously, the U.S. Education Department paid a commission as high as 16 percent of the entire loan amount only if collectors convinced defaulted borrowers to make stiff monthly payments. Starting this month, the fee dropped as low as 11 percent, no matter the payments’ size, according to a copy of a new contract obtained under the U.S. Freedom of Information Act.
With $77.4 billion worth of student loans in default, the federal government turns to an army of private collectors to pursue borrowers. These companies, which receive about $1 billion annually in commissions, have faced growing complaints that they insist on high payments, even when borrowers qualify for leniency, Bloomberg News reported in March 2012. Under the new schedule, collectors will no longer have an incentive to avoid offering affordable payments tied to borrowers’ incomes.
“It’s a big deal,” said Persis Yu, a staff attorney with the Boston-based National Consumer Law Center. “It will make life easier for borrowers. We’re not setting people up to fail.”
Federal-aid law requires collectors to offer “reasonable and affordable” payments, so debtors can rehabilitate their loans, repairing their credit and making good on what they owe taxpayers.
Under Education Department contracts, collection companies rehabilitate a defaulted loan by getting a borrower to make nine payments in 10 months.
The law mandates no minimum payment for a borrower to enter a rehabilitation program, and collection companies may take borrowers’ finances into account.
Yet, under the old contract, the companies received a much higher commission if borrowers made a minimum payment of 0.75 percent to 1.25 percent of the loan each month, depending on its size.
For example, a $20,000 loan would require payments of about $200 a month for the collection company to get its full commission. Then, the collector would receive 16 percent of the loan amount -- or $3,200. If the payment fell below that figure, the collector got an administrative fee of $150.
That differential provided an incentive for collectors to insist on the amount triggering the commission and fail to tell borrowers they could pay less, Yu said. Under the new contract, borrowers with high debts and low incomes could get back on track while making payments of as little as $5 a month, while collectors could still make their commission.
The new commission schedule is part of an Obama administration effort to give borrowers a break as student loan debt surpassed $1 trillion amid skyrocketing tuition costs. As of last year, 5.7 million student-loan borrowers were in default, generally meaning they have failed to make payments for 270 days or more.
In 2009, Congress expanded a program that lets students tie payments to their incomes. Obama has pushed to make the program more generous.
It’s a sliding scale, based on their debt, salaries and family obligations. A single borrower with $25,000 in loans and $20,000 in income would have to pay about $40 a month, according to a government loan calculator. If circumstances don’t improve, the loans can be canceled in as few as 20 years.
The Education Department wants to provide “flexible repayment options” while maintaining “a reasonable balance between borrower and taxpayer interests,” spokesman Chris Greene said in an e-mail.
Twenty-two collection companies work directly for the Education Department. They include Horsham, Pennsylvania-based NCO, a unit of Expert Global Solutions Inc., which is majority- owned by JPMorgan Chase & Co. (JPM)’s private-equity arm, and Pioneer Credit Recovery, owned by SLM (SLM) Corp., commonly known as Sallie Mae, the largest student-loan company.
Most of the same outfits have contracts with state guarantee agencies that also chase student-loan borrowers on the government’s behalf. The contract change applies only to collectors working directly for the federal government.
Former debt collectors told Bloomberg News 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. In the year ended in September 2011, the department received 1,406 complaints against the debt collectors it hires, up 41 percent from the year before.
Debt collection companies said they follow federal laws and use all available tools to recover money for taxpayers, helping to make sure future college students have access to financial aid. The companies helped the Education Department recover $13.1 billion in defaulted loans during the year ended Sept. 30.
Regardless of commission rates, NCO offers “all available federal programs,” Tim Galloway, senior vice president, said in a phone interview. The company always treats borrowers “with dignity and respect,” he said.
Pioneer “works one-on-one” with defaulted student-loan borrowers, offering government programs “helping them return the money they borrowed to American taxpayers,” Patricia Nash Christel, a Sallie Mae spokesman, said in an e-mail.
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