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.