Our current system for collecting student loans makes no distinction between deadbeats who cheat and the much greater numbers of people who just don’t have the money to repay. As predatory debt collection agencies ruin the lives of more and more Americans, we are ignoring an easy and fair solution.
So after she graduated in May 2011 and passed her bar exam later that summer, she put in the paperwork for consolidating all her federal loans and using the IBR option for repaying them. But she didn’t hear back from the Department of Education for months—and became alarmed when she started getting letters from her original lenders warning her that she was overdue on her payments. By February, completely panicked, she started trying to reach the loan “servicer.” Servicers are the organizations (some for-profit, some nonprofit) that the government or lenders hire to handle the paperwork on student loans. The servicing representative she talked to dismissed her concerns, saying that the consolidation would be completed any day now. It wasn’t until April that she learned that the department was having trouble consolidating one of her loans—a Perkins loan she had received through her alma mater, Davidson College. The department had been alerted to the problem months earlier, but for some reason the servicer was unaware of it. Meanwhile, her original loans had become delinquent and were in danger of defaulting.
The consolidation was finally completed in May, and she thought her problems were behind her. In her application for consolidation, she had checked a box indicating that she wanted to repay through IBR, and assumed that she would now hear from the department about how to enroll in the program. Instead, she received her first monthly bill from the department for $1,600, a figure that represented half of her take-home pay. She called the servicer again, and learned for the first time that she had to fill out a separate application and submit a copy of her income tax return.
A servicing representative mailed her the form, and she promptly returned it with all of the required documentation. She once again thought she was in the clear, until she received another bill for $1,600. Irate, she called the servicer again, only to be told that the servicing company had never received her application. The representative first questioned whether she had really sent the form, and then accused her of sending it to the wrong address.
Now she is waiting for the servicer to mail her a new application form to fill out. Nearly a year has passed since she began the process, and even with a law degree, she has still not figured out how to make the bureaucracy and its various contract agents deliver a benefit to which she is clearly entitled by law. Meanwhile, because her loans have become delinquent while she’s waited for the department to refinance her loan, her credit is shot. The experience, she says, has been “maddening.” She no longer trusts that the department’s servicing representatives have her best interest in mind. And get this: assuming she ever gets approved for IBR, she’ll have to repeat the application process every year, according to current law, or be automatically kicked out of the program.
Why do the servicers provide such lousy service? One
reason is basic institutional incompetence, says the National Consumer Law Center’s Loonin. But just as important, she says, is the complexity of the regulations that govern the terms and procedures of the various student loans. Even servicing representatives who are sincerely trying to help “really don’t understand the programs,” says Loonin. And, of course, if the loan professionals have trouble grasping the nuances of all the loan programs, what chance do average borrowers have? (For an as-simple-as-we-can-make-it explanation of federal student loan repayment options, see “Got Student Debt?”)
If loan servicers can be exasperating to deal with, the debt-collecting companies can be downright scary. The federal government contracts with twenty-three such firms to collect on loans in default, paying the industry hundreds of millions of dollars annually in fees and commissions. Well-documented horror stories abound about how these collection agencies routinely fail to inform borrowers about repayment options to which they are entitled, demand excessive payments, refuse to provide documentation to back up their claims, call at all hours, harass borrowers’ friends, family members, and neighbors, and generally lash out in abusive and threatening ways.
One of the most aggressive loan-collection firms is Pioneer Credit Recovery, a subsidiary of student loan giant Sallie Mae. Consumer Web sites are full of complaints about the company’s practices. Meanwhile, former Pioneer collectors recently told Bloomberg Businessweek that the company has a “boiler room” culture, where low-paid workers are richly rewarded for squeezing the most money they possibly can out of defaulted borrowers. Those who miss their targets are under constant threat of losing their jobs. “When you’re making eight bucks an hour, it’s all about the bonuses,” said a former Pioneer employee who worked at the collection agency from 2004 to 2007.
Despite such complaints and accusations, Pioneer regularly scores at or near the top of the rankings the Education Department uses each quarter to reward the best performing of its debt-collection contractors with new accounts and generous bonuses. Why? Because the rankings are based almost entirely on the amount of dollars collected, with little regard for how borrowers are treated.
In theory, the department could discipline collection agencies that are known to abuse borrowers by cutting the companies’ fees or ending their contracts. But in 2003, the Department of Education’s inspector general released a disturbing report that took the department to task for its complete and utter failure “to track and monitor complaints” that were made against the collection agencies. By neglecting to follow its own detailed policies for reviewing complaints, the Education Department, the report concluded, didn’t have any idea whether its contractors “were appropriately servicing borrower accounts and adhering to applicable laws and regulations.”
The National Consumer Law Center’s Student Loan Borrower Assistance Project recently found that little has changed in the intervening years. In a report it released in May, the group revealed that the Department of Education and most of the collection companies it hires make it unnecessarily difficult for defaulted borrowers to even lodge complaints. “As long as the Department and its contractors can deploy extraordinary collections tactics to recover federal loans, borrowers must have an accessible way to register their dissatisfaction,” said the report.
In recent months, the Obama administration has taken some steps to address the mess on the back end of the student loan system. The Department of Education has proposed new rules that would require all collection agencies to determine how much income and expenses defaulted borrowers have—something the department hasn’t required them to do until now—and to then craft repayment plans based on the borrower’s ability to pay rather than demand minimum payments based on the original loan amounts. The president has also ordered the department to set up a system to allow borrowers to apply for income-based repayment online without having to go through servicers.
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