Journalism in the Public Interest

While White House Emphasizes Easing Student Debt Burden, Fed Contractors Play Hardball

President Obama has touted efforts to ease the burdens of student borrowers with federal loans, but some federally contracted collection agencies neglect to lay out borrowers’ best options.


Photo by Mark Wilson/Getty Images

It was with some fanfare that the Obama administration announced last fall that it was ramping up a program to help students with federal loans reduce their monthly payments. Under the program, payments are adjusted based on how much students earn — what’s known as income-based repayment.

Yet, even while the administration has emphasized easing the burden for student borrowers, some contractors with the Department of Education appear to be exacerbating it.

Bloomberg reported this week that some federally contracted debt collection agencies have been playing hardball with borrowers who are behind, insisting on payments the borrowers can’t afford — even when federal student-loan rules allow more leniency.

 The debt collectors have an incentive to be tough.  As Bloomberg explains:

Under Education Department contracts, collection companies “rehabilitate” a defaulted loan by getting a borrower to make nine payments in 10 months. If they succeed, they reap a jackpot: a commission equal to as much as 16 percent of the entire loan amount, or $3,200 on a $20,000 loan.

These companies receive that fee only if borrowers make a minimum payment of 0.75 percent to 1.25 percent of the loan each month, depending on its size. For example, a $20,000 loan would require payments of about $200 a month. If the payment falls below that figure, the collector receives an administrative fee of $150.

The Department of Education is trying to balance its interest in helping struggling borrowers and stewarding taxpayer dollars, department spokesman Justin Hamilton told Bloomberg. 

Striking that balance, it seems, hasn’t been easy. Consumer advocates chafed when President Obama, as part of a deficit-reduction plan promoted last fall, recommended allowing debt collectors to robo-call the cell phones of borrowers who fell behind on federal student loans and other debts to the government.

That plan didn’t get far. But the measure resurfaced as a line item [PDF] in Obama’s proposed 2013 budget last month.

As Bloomberg noted, federal student-loan rules require that collectors work out “reasonable and affordable” payments with borrowers to get them back on track, but the rules don’t spell out how such a calculation should be made. The Department of Education is meeting with key student-loan stakeholders this week to discuss, among other things , whether to use the income-based repayment formula to help set that standard. (As it stands, only borrowers who are current on their federal loans are eligible for help via income-based repayment.)

One thing that isn’t on the table at these rule-making meetings? A measure hailed by some advocates as potentially the single most important rule change for student borrowers who’ve become severely disabled and are seeking a discharge of their federal student loans. As we reported last year, the department initially pledged to overhaul the program and consider whether to simply accept Social Security determinations of disability instead of its current complex and opaque process. The department subsequently backed off that fix. Now it isn’t even on the agenda [PDF].

This is just for starters. There have been and still are “Schools” that will eventually disappear with the records, the monies, and thousands of students hopes and dreams for a better life, who only have a whopping debt left to show for their experience. Who does the Department of Education focus IT’S efforts on? The victimized students, of course. It would take growing a pair, plus some real effort to stop the criminals who keep doing this. If you’re in a large urban area, likely 1/3+ of your “Private Certificate Schools” are these types of operations. It’s time to “beef up” the Community College System and refocus the “Collection” efforts on the real thieves!

Don’t forget that, due to Bush’s bankruptcy overhaul, student loans no longer count.  So even if you agree to trash your credit, you’re still paying.

I’m going to say something that sounds horrible, but I want to make it clear that I have a graduate degree and (in my spare time) am an adjunct professor at a school you all know.  A good friend also runs a major lab at an Ivy.  So, to preface, I’m not against education or some bitter slacker who failed out.  I’m on the side of the schools.

That said, it’s all edging precariously close to a scam and I strongly suspect what we’re hearing in this story is a cry for help.

First of all, that no school educates its students about how the loans work suggests they’re complicit.  As an undergraduate, I worked with the Bursar, and we were both reprimanded for having the audacity to call people who owed money to ask them about their situation.  Turned out, though, most paid with just that friendly reminder, having honestly forgotten about us.  But that was BAD, somehow, and not for any privacy-protection reason.

Second, the value of a college education is dropping like a rock as more people go to college and stay for graduate school.  The prices have skyrocketed and the curriculum has been diluted, so there’s not much difference (frankly) between a high school dropout and a college graduate except the latter has more embarrassing pictures on his Facebook account.

(Just this week, a fellow adjunct told me that she has a student in her class who, given an assignment to write a program—in a non-introductory programming class—that converts inches to feet, claimed he would need more information to solve the problem.  Apparently, he looked it up on the web and found dozens of approaches, so he needed to know what was right.)

Third, for most career paths, a college degree is just a way to keep Human Resources from throwing out your resume.  But if you actually want to learn, the Internet has opened up resources far in advance of what any school has for every field up to the most advanced engineering disciplines.

You can learn programming by working on a free project (Firefox, Linux, whatever), design planes with free CAD software, write and edit on a blog (or articles on Wikipedia), and join communities of like-minded people to make connections.  There are millions of books (Project Gutenberg, Internet Archive, and so on) to study and study from.  And that doesn’t even start to talk about cooperative efforts.  Or free, online courses, like Khan Academy or streaming video of MIT and other lectures.

I’m not saying there’s no use for college.  I got a lot out of my education, far more than I paid for it (though I did have a scholarship and my loans were paid off quickly because of a decent first job and no real expenses to speak of), and I work very hard to make sure the courses I teach are worth the time and money through guided discussion and the discipline of working alone and under stress (like an exam).  But it’s not for everybody, and it’s not worth the price for the majority of people it is for, at least at this point.

And I think a lot of the schools see the writing on the wall.  So they’re very anxious to get kids into the program, raise tuition to obscene levels, and cut deals with banks and collections agencies to get what they can while the getting is still good.

I’m not sure what to do about the people currently paying off loans (including my sister, who finished a long time ago), but we also need to look to the future before that list gets longer.  That means accepting that there’s a bigger world out there than “high school makes factory workers, honors classes make managers, and college makes engineers” or “everybody deserves to spend six-figures getting a second-rate education.”

If we only focus on what recent graduates pay, we’ll only need to do it again every year until the end of time.

“Predatory Lending” at its best, by allowing collection companies with their own “Bottom Line” at heart to harass and browbeat delinquent student loan borrowers who, most likely, lost their jobs or working at low-pay rates, unable to provide the high amount payments required.  Those with less than 100% disablements harassed and threatened with garnishments from their gov’t checks. Then to reward those collection companies with gov’t dollars for collecting any amounts. “Income Based Repayment” plans are a joke also, because in a low-income job, often times the amounts repaid are less than the interest rates charged and capitalized yearly, thereby increasing the amount owed. Then we have the disparity of some groups of borrowers getting a low rate of interest while others are paying or are unable to pay much higher rates. It would seem that a consistent and affordable rate of interest, preferably lower, applied to all student loans would be the goal for all. Why would a person be able to get a home loan at a very low rate of interest over a 30 year period while a person wanting a better education for a better paying job, a better life, be forced to pay a doubly higher rate of interest, often resulting in years of repayment. Those years of repayment may mean the difference between buying a home or not. All of the issues concerning student loans were created by members of Congress in their efforts to make sure no one person could enrich themself by taking advantage of the program, but surely provided for banks, financial institutions, and collection companies to enrich themselves.

I listened to a lady on radio last year. She had graduated with a Masters in Art History. She had missed a lot of payments and he fines had gone onto the priincipal, so she owed over $100 k. Each month, she coldpay her rent, or pay her student loan. The host, a awyer, told her her best bet would be to leave the country,because he principal was growing with every late, missed payment and there was no bankruptcy protection for her-ever.

College education is going the way of public education.  Agree that online courses are way to go.  I do not know why Feds attach such large interest (almost credit card rates) to their loans.  If loan rate was equal to CD interest rates students may be able to see a light at the end of the tunne.  Ridiculous that govt. wants to make money off those who have ambition to be productive.

To all of those extolling the virtues of online courses and degrees—would you want your surgery performed by a doctor with an online degree or your child taught by someone with an online degree? If it ever became widely accepted, online learning would turn into the scam that for-profit colleges and universities have become.We don’t need to throw out the baby with the bathwater. We just need to reform the system that we do have by making sure that educational institutions fully disclose their complete costs and the ramifications of taking out loans to students before they begin their education. Also, education may take longer because people are going to have to work to pay for the education instead of taking out loans.

Lisa you arnt serious are you? Did you forget that doctors first get the knowledge but all are required to do pre-med where they must pass muster in the way of hands on experience. On the other hand you might hand a financial broker all your money to invest and all he has to do is pass his series seven test. You can become an attorney if you pass the law exam.
And of course you can become president of the United States without any degree at all, no school or passing of tests required.

Uh, why would students borrow tens of thousdands of dollars in the first place? Nothing against an Art History degree or Sociology degree but the ROI on that can’t be very good. Not everyone should or can afford to go to college. You borrow money you pay it back. If you can’t understand the terms don’t agree to them. I have trouble sympathizing here. I know plenty of kids on the 6 year plan to receiving a generic degree that have been living the good life and will soon be straddled with debt. As a wise man once said “the world needs ditch-diggeers too you know”.

The US used to boast we had the highest amt. of college graduates in the world, but we see again, quantity is not quality.

The problem now is that too many are going to college to be taught what they should have learned in High School.  The first 2 yrs of college are largely wasted on general topics which you should have learned already in High School.  In the UK, I think college is only 2 years.  In Germany it is 4 or 5, but it is equivalent to a master’s degree w/ little general ed fluff.  Now, if you don’t know what interests you, you should go to a community college and sample various fields.  If you can’t do algebra or write with proper grammar you should not be in college until you learn those things, otherwise you are going to get a “worthless” overpriced degree IMHO.

Michael Moore

April 3, 2012, 9:47 p.m.

Scott, I absolutely agree. There are now restrictions, as I understand it, where a school can not offer a financial aid package whch results in a degree in a field where there is little hope of earning enough to repay the loan. I also listened to a lady who had a degree to become a para-legal but was losing her house and will never be able to repay the money she borrowed. She can’t get out of it. Of course it’s dumb.  Theproblem is that dumb mistake ruins their life and there is no hope of recovery.

To clarify, I wasn’t suggesting abandoning all education in favor of online courses.  I do think that a motivated student who doesn’t have an interest in networking with people with similar interests can pretty easily substitute one for another, but I don’t recommend it as a silver bullet.

What I meant was that the free, online courses taught by people who love the material because they love the material are the competition.  Any college needs to be at least that good to be worth a penny, or at least provide something beyond what’s already free.

It needs to provide a LOT more, if the price is the same as a small house.  If a school is not providing that much more, and is trying to skate by on the fact that you’re competing against college graduates for that burger-flipping job, then the student is far better served by learning online and getting directly involved with professionals in the industry as a kind of apprenticeship.

I read with great interest the previous comments on the school loan issue.  And as mentioned before the blame truly lies with our Congress.  They set the rules.  Rules that were not in the best interest of the students (“we the people”), but rather in the best interest of the banks and corporations.  It makes no sense when you have a set of rules which disallows bankruptcy, disallows being able to consolidate student loans down the road out in the competitive marketplace at a lower interest rate.  It’s insane. 

And now we are saddled with the worst economic conditions since the Great Depression….also caused by Congress.  Every year we read in our local and national newspapers that recent college graduates can’t find jobs.  Now with millions of people out of work the spectre of finding work for college grads is even more frightening. 

When you have a system that allows lobbying of our Congress from all sectors, you can’t have a system that is fair.  All decisions in Congress should be made in the best interests of the majority of our citizens, but it can never happen when we allow lobbyists working for the banks, corporations, etc. and then higher education institutions in league with them.  You know what’s going to happen.  When a top lobbyist, like say for the American Pharmaceutical Association, is paid $2 million a year, how can their ever be equity?  How can there be parity? And I am sure the lobbyists for the banks get paid quite well when Student Loan Bills are being written by Congress. And how can getting bonuses for bringing in loan payments preventing possible default be financially productive?  It wipes out the principal and interest of what was just paid by the student.  I just don’t get it.  It all seems very crooked to me.

Great post.  Congress since 2007 is an issue.  Obama in 2009 also. Seems like college grads with loans to pay are the pawns.  Loan rate should be CD rate.  The system is broken.  Compounding interest should be for savings, not loans from US.  Anyone have ideas how to fix it?

Fran, I recently had to go back and read George Wasington’s farewell address. He would vehemently agree with you.

I have done some work for colleges. I am surprised by how fancy they are, especially Food Courts. I sometimes wonder what would happen if a college were Spartan, and just educated students.
No research programs and therefore no Graduate programs. Just teach students well. No varsity sports, intramural only. Just teach students with professors, not TA’s.
It sure would seem to me like that would be a solution for SOME people (not all though).

Scott, your comment about using CD rate to set the loan rate is very interesting.  Putting a ceiling on how high it can go.When has a CD return rate ever been very high?  Also maybe offering 5-year increments for renewal, or pick the length of your loan option. Why are these fed contracted banks so worried about losing money if student loans are consolidated or keeping the interest rate below 8%?  Homeowners refinance all the time at lower rates and the banks lose lots of money in interest over the life of the loan. 

And Michael Moore seems right in that since the schools are making their facilities ritzier and ritzier, who pays for that?  The students with higher tuition, room and board and then they have to take out bigger loans to pay for the education.  If that trend continues fewer and fewer will be able to attend college.  We will be back where it used to be.  You are at college to learn and be educated by well educated professors.  Putting many thousands of dollars to make the food court at the school really posh has nothing to do with education.  And extensive sports facilities…how many students who are great at football or basketball go on to make it a career? 

It used to be that when you went searching for the right college to attend, you’d read the list of professors in the major field in which you are interested and count the number of Phds.And how many only have their Masters so far.  Also you would look to see how much they had published….and if they are a substantial and prominent lecturer… or they really knew how to teach and actually be able to get across to the student the subject matter so that it is understood.  Does anyone choose a college because the dorm rooms are glamorous or because the food court is well-designed and offers 20 dishes at each meal?  Personally I like to see the professor in person and speak with him or her. 

I understand that most Universities with online degrees are charging the same tuition fee as being able to sit in the classroom and directly interact with the professor. Something is wrong there. You are not going to have the professor’s attention in the same way online - except maybe through Skype - as you would in the classroom.

I was in Australia in ‘89 for several months, and just before I left to return home the biggest issue in the news was that the Australian govt was going to make the students pay something for their yearly tuition.  Currently the students had been paying almost nothing..just books.  The students were protesting having to pay several hundred dollars a year toward their tuition.  They didn’t know how well they had it then or did they?

This article is part of an ongoing investigation:
College Debt

College Debt

Total outstanding college debt is estimated at $1 trillion dollars – and with costs still soaring, the burden on students and their families shows no signs of abating. We're examining how the complicated system of college debt is putting the squeeze on families.

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