Editorial: Student loan debt collections aren’t paying off

The Orange County Register
Guest Editorial


American taxpayers are getting a raw deal on federal student loan programs, shelling out $38 to collect $1 of student loan debt, according to a recent Bloomberg analysis.

Student loan debt collection sure is a booming business lately. Total student loan debt nationwide is up to more than $1.3 trillion, trailing only mortgage debt, according to the Federal Reserve Bank of New York’s most recent Quarterly Report on Household Debt and Credit. In the wake of the last recession, it surpassed both auto loan debt and credit card debt, and now is nearly double outstanding credit card balances.

Even worse, 11 percent of aggregate student loan debt is 90 or more days delinquent or in default — more than twice the average rate for all household debt (4.8 percent). Moreover, the New York Fed explained, because many student loans are in deferment, grace periods or forbearance, they are not included in this statistic, so the actual delinquency rate is about twice as high.

The government’s debt rehabilitation program does not seem to be getting results. Approximately 30 percent of those who exited a default through rehabilitation had defaulted again within two years, and more than 40 percent did so within three years, according to a CFPB report released this month. And of those who defaulted a second time, more than 75 percent failed to pay a single bill.

This is despite some pretty low repayment hurdles. “If a borrower subsequently makes nine on-time monthly payments of as little as $5 during a 10-month period, their loans are returned to good standing and the default is supposed to be wiped from their credit reports,” Bloomberg’s Shahien Nasiripour explains.

Nevertheless, debt collection contracts with the Education Department “are among the most lucrative in the industry,” the article notes. “Close to 80 percent of borrowers who rehabilitate their debt make the minimum $5 monthly payment, according to a 2015 estimate by the National Council of Higher Education Resources, a lobbying group that represents student debt collectors and servicers,” Nasiripour reports. “That means the Education Department is paying its debt collectors up to $1,710 per borrower to collect around $45, regardless of whether the borrower continues to make her payments.”

Only in government would this make sense and be considered an acceptable practice. A private company that paid out 38 times as much as it was bringing in would soon find itself out of business.

It would make much more sense to pay debt collection companies a portion of the money they are able to recover, perhaps with performance bonuses for loans they service that remain in good standing for several years.

An even better option would be to get the government out of the loan business altogether. Loans should be granted based on an analysis of acceptable risk of repayment, not as a form of welfare.

Government has created a vicious cycle by encouraging more people to go to college through generous grants and below-market-rate loans, which drives up tuition costs, which requires ever more government subsidies.

When the federal government effectively took over the remainder of the student loan market in 2010, it replaced a system which critics claimed was “gouging” former students (by charging market interest rates based on supply and demand and the likelihood of repayment) with one that is gouging all other taxpayers.

— The Orange County Register, May 30