April 12, 2014
Dept of Ed Fails with Student Loan Debt Collection
Efforts by the U.S. Department of Education to rehabilitate defaulted student loans have been seriously flawed, according to federal investigators.
Testifying before Congress on March 12, an official from the Government Accountability Office (GAO) highlighted “serious weaknesses” in the department’s management and oversight of the loan rehabilitation process.
The Education Department failed to properly implement and oversee a computer system upgrade in 2011, during which time it couldn’t process rehabilitations. Because of that, some 80,000 borrowers were unable to get their loans out of default.
Additionally, the Department’s poor oversight of debt collectors has had a negative affect on the ability of delinquent and defaulted borrowers to rehabilitate their student loans, according to the GAO.
For its part, the Education Department testified that it has strengthened its procedures to oversee debt collectors and has created a database to identify and track errors in order to correct them.
However, as Connecticut attorney Joshua Cohen, sees it, there’s no oversight from the Education Department – and there never has been.
“Debt collectors aren’t doing rehabilitation correctly,” he said. “If you want to take a look at why the default rate is as large as it is, it’s because people aren’t getting cured the way they should be.”
And the default rate is troubling. Last fall, the Education Department released study results indicating that 10 percent of borrowers whose loans came due two years prior had defaulted, while 14.7 percent of borrowers whose loans came due three years prior had defaulted.
Cohen speculates that defaults are on the rise because student loan rehabilitation isn’t being offered, and that the Education Department doesn’t have the employees or the budget to get the job done.
Noting that the Education Department contracts with 22 third-party debt collection agencies to collect on federal student loan debt, Cohen said, “I don’t think the [Education Department] has the manpower to review all 22 debt collectors and what they’re doing and how they’re doing it.”
Cohen says that his lack of government oversight means debt collectors are free to harass and frighten consumers in violation of the federal Fair Debt Collection Practices Act (FDCPA).
“What they say is, ‘If you don’t rehabilitate with us by a certain date, we’re going to garnish your wages,’” Cohen said, even though student loan debt collectors are prohibited from recommending wage garnishment until they’ve either had the account in collection for 60 days or the borrower has the ability to pay and refuses to do so.
“So they’ll tell the borrower he’s refusing to pay [the required] rehab fee so they’re forwarding it for wage garnishment – and they’ll do it before 60 days. And that scares people,” he said.
In addition, Cohen said the debt collectors also intimidate consumers by telling them it’s the government coming after them.
And if the person is represented by an attorney, the debt collectors aren’t allowed to contact that person – but it happens, according to Cohen.
Similarly, the FDCPA prohibits debt collectors from calling a person at work if they’re told not to – but they do, Cohen said.
“They’re allowed to call HR only to verify employment, but instead, they call HR and say, ‘We’re collecting a student loan.’ And they leave a message with the boss or a secretary telling them it’s a very important personal matter about a student loan or about a debt.”
Cohen asked, “But who catches these debt collectors – not [the Education Department] because there’s no oversight.”
Student loan borrowers who are harassed by debt collectors can sue in federal court for violations of the FDCPA and recover up to $1,000. But most consumers don’t know their rights. “What are the odds of them actually getting caught?” asked Cohen. “And if they do get caught, they’ll say it was a mistake and then settle.”
Stephen Burd, Senior Policy Analyst, Education Policy Program at the New America Foundation, agreed that without oversight by the Education Department, debt collectors have free rein.
“The Education Department is more interested in making sure that the trains are running,” Burd said. “They’re more interested in the actual process than in making sure that it’s working well for borrowers.”
Burd says that the Education Department’s relationship with third-party debt collection agencies is too cozy. “I think that in some ways, they’re too close to their contractors,” he said.
Persis Yu, staff attorney at the National Consumer Law Center, said a primary problem is that debt collectors aren’t trained to understand borrowers’ rights and how to effectively and correctly administer the student loan rehabilitation program.
Often, even when borrowers want to resolve their outstanding loan issues, they have to deal with rude or abusive behavior from debt collectors, she said. Moreover, borrowers are unable to lodge complaints against debt collection agencies with the Education Department, she said.
And that leads to a system that rewards debt collectors despite their questionable and sometimes illegal tactics.
“The debt collectors are ranked based upon how much money they collect,” Yu said. “And their performance and their customer service is supposed to be a component of that, but [one company] that has been investigated and settled with the [Federal Trade Commission] for bad practices is one of the highest ranked debt collectors.”
Burd said that the people overseeing the debt collectors are in the Federal Student Aid Office, which is more concerned with operations than policy.
“And the Federal Student Aid Office very much sees its contractors as its partners rather than those who are regulated,” he said.
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