Debt collectors have been known to use dirty tricks to get consumers to pay, but those collecting student loans have an especially powerful tool on their side. Unlike most other debt, student loan debt cannot be routinely discharged in bankruptcy. And depending on the type of loan, the debts can be collected through wage garnishments or even as deductions from Social Security checks. Student loan borrowers suffer from a decided lack of leverage when dealing with lenders and collectors.
This position of power emboldens student loan debt collectors. Perhaps that's why, when the Consumer Financial Protection Bureau examined student loan servicing recently, it found a company that routinely called debtors at odd hours, violating federal law. In fact, one borrower received 48 such calls.
The massive student loan problem (there's now more outstanding student loan debt than credit card debt) is an anchor that is severely hampering some young Americans from starting their adult lives. Roughly one-third of adults aged 18-31 live with their parents. Of course, it's not the amount of the debt that's the problem, it's the number of former students who can't pay the debt. Earlier this year, the Government Accountability Office said that about $94 billion -- more than 11 percent of the federal student loan volume in repayment -- was in default.
Most of those in-default consumers will end up in the hands of a debt collector. In fact, The Department of Education contracts with private debt collectors in an attempt to recover the debts. The agency estimates that in 2014, taxpayers and student loan borrowers will pay over $1 billion in commissions to student loan debt collectors, growing to over $2 billion by 2016.
For years, advocacy groups like the National Consumer Law Center having been trying to get student debt collectors, particularly those working for the Department of Education, to clean up their act. Advocates say that many do a poor job of explaining options to borrowers who fall behind, for example. A report issued by NCLC in September was heavily critical.
"The government's use of debt collection agencies is short sighted in that promoting paths to success for struggling borrowers, especially those who are low income, is ultimately less costly for taxpayers than hammering them ... the rest of their lives with draconian collection tools," said National Consumer Law Center attorney and co-author Persis Yu.
Now, there is some new federal attention on student loan debt collection. The CFPB supervises student loan servicing at large banks, and is supervising other kinds of student lenders, too.
Last week, the agency issued a supervisory report which offered examples of anti-borrower behavior in student loan collections, impacting both consumers who were up to date and those who were in default.
"In at least one examination, Supervision cited a student loan servicer for an unfair practice because its automated dialer routinely placed telephone calls to delinquent consumers in the early morning or late at night, which examiners determined was a form of harassment and an unfair practice. During the review, examiners identified more than 5,000 calls made at inconvenient times during a 45-day period, which included 48 inconvenient calls made to one consumer," the CFPB wrote.
Payment allocation designed to maximize late fees
"CFPB examiners have reviewed how servicers allocate payments when a borrower pays less than the total amount due on all of the loans in the borrower's account. Examiners found that partial payments were being allocated proportionally, or pro rata, among all the loans, resulting in all of the loans in a borrower's account becoming delinquent. In instances that examiners observed, each loan in the account was then charged a minimum late fee. Taken together, these practices maximized the late fees for the consumer," the CFPB found.
Inflating minimum payment requirements
"CFPB examiners identified a deceptive practice where a student loan servicer represented to consumers that an inflated minimum payment was due on periodic statements and online account statements. The minimum payment amount included accrued interest on loans that were still in deferment, which was therefore not actually due," the CFPB wrote.
Late fees during grace period
"CFPB examiners found one or more supervised entities that were charging late fees when payments were received during the grace period. Like many other types of loans, many student loan contracts have grace periods after the due date. If a payment is received after the due date but during the grace period, the promissory note stated that late fees would not be charged. Examiners have found instances where late fees were being charged during the grace period," the CFPB wrote.
Unpaid student loan debt is serious business. It can damage a former student's credit score for years, making it much harder to get other kinds of credit, such as a mortgage. It also leaves a black mark on their credit report visible to future employers, insurers, and every other entity that has access to it. (If you're concerned about how your student loans are affecting your credit, you can see two of your credit scores for free on Credit.com.)
Paying off the debt is essential to moving on with life. So criticizing debt collection tactics, while legitimate, doesn't improve things for debtors. What does? Getting the debt out of default by working out a reasonable repayment plan, something the CFPB is encouraging lenders todo. There are also forgiveness programs for graduates who work in certain fields, such as teachers who take jobs in low-income neighborhoods. And in extreme cases, despite what some lenders tell borrowers, it is possible to prove "undue hardship" in bankruptcy court and have student loans discharged.
So the calls might be rude, and consumers should exercise their rights to fair treatment, but no one with student loan debt should ignore the problem. It only gets bigger.