The standard drill for collections on most debts is that the lender sells the debt to a collections agency for a fraction of the loan’s balance. It then (hopefully) obeys the laws to convince the borrower to repay it.
For student debtors whose education loans are directly lent from the federal government (not the older guaranteed loans), however, the system doesn’t work like that. Instead, the Department of Education contracts with private agencies to resolve any debt that has gone delinquent or into default. The consequences, according to a new report by the National Consumer Law Center (NCLC), are disastrous for borrowers and embarrassing for the government.
The problem, the report states, is that the collections agencies have a clear conflict of interest. If they tell debtors that the government offers them loan rehabilitation and other options, they make less money. As a result, collectors are motivated to hound debtors, often in violation of consumer protection laws. Here are some examples of behaviors the NCLC uncovered.
- One debt collector told a student debtor who was trying to obtain an administrative hardship discharge that it would be unavailable because the loan was in default.
- Another debtor was informed that loan rehabilitation programs were based on loan balances and not on debtors’ incomes.
- A debtor was told that an income-based repayment plan was unavailable for a rehabilitated loan.
- One debt collector called debtors repeatedly even at night, in the early morning, and at work. It disclosed private information to third-parties, and even attempted collections without verifying it was owed a debt.
All these examples are either misrepresentations or illegal behaviors.
Astonishingly, in fiscal year 2012 (October 2011 through September 2012) complaints by debtors had no bearing on the Department of Education’s evaluation of debt collection agencies. Even in 2014, the department’s Office of the Inspector General claimed the department “failed to monitor borrower complaints against collections agencies, and did not take corrective action against the agencies when they did not improve.” Additionally, actions taken by other federal agencies, like the Federal Trade Commission’s charges against one student debt collection firm that ended with a $3.2 million settlement, don’t affect the Department of Education’s scoring of debt collectors.
In 2014, taxpayers are projected to pay $1 billion to student loan debt collectors, a figure that will double in 2016.
Full text of the NCLC’s report can be found here.
Debtors with direct federal loans have alternatives that other consumers have, like income-based rehabilitation plans, hardship discharges, and other alternatives. A New York bankruptcy can also free payments to other creditors that can be directed to student loans. If you’re encountering problems with a direct federal loan, a New York bankruptcy lawyer might be able to help.
For answers to more questions about student loan debts, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy lawyer Brooklyn NY Bruce Weiner for a free initial consultation.