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| Washington DC - Occupy DC (Photo credit: thisisbossi) |
At a protest last year at New York University, students called attention to their mounting debt by wearing T-shirts with the amount they owed scribbled across the front - $90,000, $75,000, $20,000.
On the sidelines was a business consultant for the debt collection industry with a different take. “I couldn’t believe the accumulated wealth they represent - for our industry,” the consultant, Jerry Ashton, wrote in a column for a trade publication, InsideARM.com. “It was lip-smacking.”
Though Mr. Ashton says his column was meant to be ironic, it nonetheless
highlighted undeniable truths: many borrowers are struggling to pay off
their student loans, and the debt collection industry is cashing in.
As the number of people taking out government-backed student loans has
exploded, so has the number who have fallen at least 12 months behind in
making payments - about 5.9 million people nationwide, up about a third
in the last five years.
In all, nearly one in every six borrowers with a loan balance is in
default. The amount of defaulted loans - $76 billion - is greater than
the yearly tuition bill for all students at public two- and four-year
colleges and universities, according to a survey of state education officials.
In an attempt to recover money on the defaulted loans, the Education
Department paid more than $1.4 billion last fiscal year to collection
agencies and other groups to hunt down defaulters. Hiding from the government is not easy.
“I keep changing my phone number,” said Amanda Cordeiro, 29, from
Clermont, Fla., who dropped out of college in 2010 and has fielded as
many as seven calls a day from debt collectors trying to recover her
$55,000 in overdue loans. “In a year, this is probably my fourth phone
number.”
Unlike private lenders, the federal government has extraordinary tools
for collection that it has extended to the collection firms. Ms.
Cordeiro has already had two tax refunds seized, and other debtors have
had their paychecks or Social Security payments garnisheed.
Overall, the government recoups about 80 cents for every dollar that goes into default - an astounding rate, considering most lenders
are lucky to recover 20 cents on the dollar on defaulted credit cards. While the recovery rate is impressive, critics say it has left the
government with little incentive to try to prevent defaults in the first
place.
Though there are programs in place to help struggling borrowers, the
companies hired to administer federal student loans are not paid enough
for lengthy conversations to walk borrowers through the payment options,
critics say. One consequence is that a government program called income-based repayment
has fallen short of expectations.
Under the program, borrowers pay 15
percent of their discretionary income for up to 25 years, after which
the rest of their loan is forgiven. But participation has lagged because
borrowers are either not aware of the program or are turned off by its
complexity.
“If people were well informed, how many defaults could be averted?”
asked Paul C. Combe, president of American Student Assistance, a loan
guarantee agency based in Boston. “We are hurting people here.”
For borrowers, the decision to default can be disastrous, ruining their
credit and increasing the amount they owe, with penalties up to 25
percent of the balance.
To read further, go to: http://www.nytimes.com/2012/09/09/business/once-a-student-now-dogged-by-collection-agencies.html?_r=1&pagewanted=all
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