Student Loans are Just That . . . Loans. Defaulting is a Risky Proposition – Part II

In part one of this column I described how borrowers of student loans get into trouble and how collection agencies, on behalf of the federal government often make their lives miserable. But just how do the debt collectors go about it?

According to an excellent article by Andrew Martin (“Debt Collectors Cashing in on Student Loan Roundup”) in the September 9, 2012 New York Times, they often start with trolling the Internet for databases that contain information on respective debtors. When they find a suspect, they contact their prey. If a debtor refuses to cooperate, is employed, the agency will try to garnishee their wages. And the government is tenacious. It usually gives a collection agency just six months before transferring the case to another agency.

The article tells the story of Arthur Chaskin of Michigan, who borrowed $3,500 in the 1970s. By last January the debt, along with interest and penalties, had grown to 19 grand. When a government-contracted lawyer tracked him down, he garnisheed Chaskin’s brokerage account. A judge reduced the debt to $8,200, 25 percent of which went to the lawyer. The object lesson here is that student loan defaulters never know who is looking for them, when the hunters will strike, and how deep in doo-doo the debtors may find themselves. And, as a reminder, repayment may even come in the form of deductions from Social Security payments – not a pleasant prospect for those on fixed incomes.

Martin reports, “Government officials estimate that they still collect 76-82 cents on every dollar of loans made in fiscal 2013 that end up in default. That does not include collection costs that are billed to the borrowers and paid to the collection agencies.” A 2007 MIT study, however, estimates that Uncle Sam collects something closer to 50 percent of debt. The bad news for student debtors – but good news for taxpayers – is that the government, year to year, is growing ever more efficient at getting its money back – an 18 percent one-year improvement last fiscal year, totaling $12 billion.

Student debt demonstration, Washington, DC, April 4, 2012 – Photo – campusprogress.org

Many defaulters are in dire straits. They received schooling and then got caught in the quagmire known as the Great Recession, unable to find work. Some are ill. Some are in over their heads with all types of accumulated debt. But with little chance of shedding their government debt through bankruptcy, they find themselves between a rock and hard place.

And even in cases where a person is broke and either ill, disabled, or unemployed, it’s not easy to incentivize collection agencies to help those debtors get into a program that either allows gradual payment – say through gradual income-based repayment – or to forebear on collecting until the debtors are back on their feet. That’s because the collectors make more money by collecting than by merely preventing default.

The creditors and debt collectors frequently don’t tell the borrowers about programs to ease the repayment burden, or the requirements for qualifying are so daunting that they give up in frustration.

Even President Obama acknowledged, “Too few borrowers are aware of the options available to them to help manage their student loan debt,” in a June memo.

Good news for borrowers may be on the horizon. Congress and the Department of Education are considering regulations that would require debt collectors to offer student loan delinquents an affordable income repayment plan. And the department has promised to do a better job of publicizing such plans, starting with those who are still in school. As part of the proposals, monthly payments would be limited to 10 percent of discretionary income.

But, according to Andrew Martin, “Efforts to change the incentive [reimbursement] structure for guarantee agencies have stalled. And the Obama administration’s efforts to impose new regulations on profit-making colleges were initially watered down and then significantly weakened by a federal judge.”

So while some folks are so deeply in debt that foreclosure and/or bankruptcy are the only ways out from under crushing debt, it will be almost impossible for them to shake off their student loan obligations.

Unless Congress (you know, the government branch with a 9 percent voter approval rating), gets head out of it’s a_ _ _ _ _ e, many of those students who made some big mistakes a long time ago will suffer for a long time to come. Congratulations to those collection agencies that care more about money than humaneness.

 

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