The federal government has, in recent years, paid debt collectors close to $1 billion annually to help distressed borrowers climb out of default and scrounge up regular monthly payments. New government figures suggest much of that money may have been wasted.
Nearly half of defaulted student-loan borrowers who worked with debt collectors to return to good standing on their loans defaulted again within three years, according to an analysis by the Consumer Financial Protection Bureau. For their work, debt collectors receive up to $1,710 in payment from the U.S. Department of Education each time a borrower makes good on soured debt through a process known as rehabilitation. They keep those funds even if borrowers subsequently default again, contracts show. The department has earmarked more than $4.2 billion for payments to its debt collectors since the start of the 2013 fiscal year, federal spending data show.
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The findings, gleaned from the bureau’s analysis of about 600,000 borrower accounts, come as the Trump administration weighs a shakeup of the government’s student loan program. For years, defaults have mounted despite the improving U.S. economy and the money invested in collecting education debt. Education Secretary Betsy DeVos pledged earlier this year to “do a better job” than the Obama administration at managing the department’s loan contractors. Last week, DeVos suggested that the feds should “start afresh.”
Officials at the CFPB say the government should reexamine whether the loan program, and the lucrative contracts it bestows on private firms, is working for the millions of Americans struggling to repay their taxpayer-backed student debt.
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“When student loan companies know that nearly half of their highest-risk customers will quickly fail, it's time to fix the broken system that makes this possible,” said Seth Frotman, the consumer bureau’s top student-loan official.
Debt collectors aggressively angle for new business from the Education Department because the contracts are among the most lucrative in the industry. The government values the latest round at $2.8 billion.
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The government often pays debt collectors nearly 40 times what they bring in, federal records show. Take the government's rehabilitation program, which targets people who have defaulted on their debt—meaning they missed nine months of payments. If a borrower subsequently makes nine on-time monthly payments of as little as $5 during a 10-month period, their loans are returned to good standing and the default is supposed to be wiped from their credit reports. But the CFPB found that more than 40 percent of these borrowers defaulted again within three years.
Even when borrowers don't default, debt collection efforts often yield little. Close to 80 percent of borrowers who rehabilitate their debt make the minimum $5 monthly payment, according to a 2015 estimate by the National Council of Higher Education Resources, a lobbying group that represents student debt collectors and servicers. That means the Education Department is paying its debt collectors up to $1,710 per borrower to collect around $45, regardless of whether the borrower continues to make her payments.
The arrangement means that debt collectors “have no ‘skin in the game,’” Frotman wrote in an October report.
The consumer bureau estimates that the vast majority of borrowers who rehabilitate their defaulted debt with $5 monthly payments are eligible for $0 payments after they exit default, under an income-based repayment plan. But about 90 percent of debtors who rehabilitated their debt failed to enroll in these programs, according to the CFPB’s analysis. All that's needed to enroll is some paperwork that enables contracted loan servicers to confirm borrowers' annual earnings, but experts inside and outside the government say they don't know why this step isn't completed, and distressed borrowers are left stuck in debt collectors' sights. The Education Department, which rewards its loan servicers with more business if the loans they service remain in good standing, excludes rehabilitated loans when grading its servicers' performance.
The consumer bureau says slipshod loan servicing—the business of counseling borrowers on their options and sending them monthly bills—is largely to blame. NCHER President James Bergeron said the feds need to simplify the various repayment plans they offer and "do a better job" helping previously defaulted borrowers get into repayment plans. Calls and emails to the Education Department weren’t returned.
"I don't see how anyone wins from this system other than the collection industry," said Adam S. Minsky, a Boston-based lawyer who represents student debtors.
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