The Department of Education has unprecedented powers to collect defaulted student loans. The agency can take tax refunds (even earned income tax credits), garnish wages without first getting judgments, and even seize portions of federal benefits such as Social Security. There is no statute of limitations for student loan collections, meaning that the government can come after borrowers until they die. To make matters much worse, it is extremely difficult for student loan borrowers to get relief in bankruptcy.
Just one example: We have an 83 year client, a retired Korean war veteran with serious health issues. He barely has enough money each month to pay for his basic living expenses and numerous health and medication expenses. The government says he took out two PLUS loans for his sons many years ago. He doesn’t remember doing so and his sons aren’t able to help him financially. As a result, he can’t buy his medication each month because the government is taking such a large chunk of his monthly Social Security payments.
You would think this extraordinary arsenal of collection powers would be enough for the government to seize just about everything from anyone who is in default on a student loan…even from those struggling to get by in retirement or in very low wage jobs. Yet the Department of Education wants more. According to a Department spokesperson quoted in a collection industry publication, estimates for collection in fiscal year 2011 show an overall lower recovery rate, “…lower than the Department had hoped.”
The government is responding in part with more incentives to spur collection agencies to extract even more money from defaulted borrowers. The Department is encouraging agencies to subcontract with other companies to increase collection recoveries. Collection agencies that subcontract will be eligible to earn up to five additional points during the performance evaluation process. The Department is also making other contract changes, including a slight increase in the commission paid to agencies. Presumably this is on top of the already exorbitant fees collection agencies charge borrowers regardless of how much effort the agencies expend.
This is all good news for the collection agency business but bad news for student loan borrowers. We have written about this issue many times before–the government’s reliance on private collection agencies not only to collect from borrowers, but also to resolve disputes and explain borrower options has been a disaster for borrowers. Unbelievably, the situation keeps getting worse. When advocates pointed out inconsistencies and other problems in the Department of Education’s 2009 collection manual, the Department responded by taking it off-line (out of sight, out of mind?..maybe, but you can find it here. We don’t know if there is a more recent version). As far as we can tell, the on-line complaint form for collection agencies is also no longer available. Trying to hide complaints about collection agencies does not eliminate the problems. Our clients and many others like them continue to run into brick walls when trying to access their basic legal rights to get out of default, even cancel loans in some cases.
Most important, we need to confront the reality of our current financial aid system. Liberal lending policies and draconian collection policies have not improved access to education for low-income students. We need to change our policies to eliminate the extraordinarily punitive collection policies AND improve the policies that allow borrowers to get out of default and start again.