With around $67 billion of student loans in default, the United States government has turned over many collection actions to private companies. And no surprise, collectors who work on commission sometimes don't play fair.
Government contractors have been faced with mounting allegations that they have violated federal law by pressuring borrowers into making steep payments - even when income levels would qualify them for reduced installment plans. In one instance a disabled mom was told she must pay $335 per month on roughly $30,000 in defaulted loans, money the family desperately needed to make rent.
Threatened with the seizure of her Social Security check and weary from an hour-long phone conversation, the woman acquiesced. She and her husband filed for bankruptcy. Now on the Education Department's income based plan, she is required to pay nothing until her circumstances improve. So why was she forced to fork over so much cash by debt collectors?
The collection business is booming. Defaults have doubled since 2003 and student loan debt has now surpassed credit card debt. All that borrowed money means collectors have hefty government incentives to retrieve past due payments. In some cases, collection agencies can reap a commission up to 16 percent of an entire loan amount.
One way to protect yourself is to understand your rights. Under US law, student loans can rarely be discharged in bankruptcy. Debtors in default can have their wages garnished or tax refunds confiscated. But borrowers are also entitled to "reasonable and affordable" payments under Federal aid law. Low-income individuals may be eligible for reduced monthly installments or loan cancellation.
Source: Bloomberg, "Obama Relies on Debt Collectors Profiting From Student Loan Woe," John Hechinger, March 25, 2012