U.S. Taxpayers Give Billions To Student Loan Collection Contractors For No Reason

The U.S. Government paid over $2 billion to private debt collection contractors to collect just under $1 billion for Fiscal Year 2011.

While researching data regarding today's recent headline that the Obama administration wants to make it easier for private companies contracted by the U.S. Department of Education to collect student loan debt by calling cell phones, a little publicized fact came to light:  U.S. taxpayers are needlessly losing billions of dollars each year in collections costs that the U.S. government could be collecting without the help of private debt collection contractors.

According to the most recently available data, total student loan debt in collections that was collected for FY 2011 as of July 2011 amounted to $10,410,993,183.

Of that amount:

1. 42% was rehabilated into a non-defaulted loan;

2. 25% was consolidated into a Direct Federal Loan.

3. This leaves 33% that had to be collected by Administrative Wage Garnishment, Treasury Offset (taking a borrower's income tax refund), and regular collections.

4.  The most amount collected was by Treasury Offsets 16% at $1,609,108, 522, followed by Regular Collections 9% at $973,874,789, then Administrative Wage Garnishments 8% at $849,332,994.

So without the expense of contracting private collection companies for regular collections, the U.S. Government would have received $2,458,441,516 into the U.S. Treasury. 

But since those are defaulted loans, the amount collected first goes to the private contractors who hold the debt contracts even if they didn't have a hand in actually collecting the money.

According to the Department of Education's website:

"Pursuant to the Higher Education Act and the terms of most borrowers' promissory notes, you are liable for the costs of collecting your defaulted Federally-financed student loans.

The largest of these costs is usually the cost of contingent fees that may be incurred to collect the loan.

The Department gives you repeated warnings before it refers a debt to a collection contractor.

If those warnings do not persuade you to reach repayment terms on defaulted loans, the Department refers those loans to collection contractors.

The contractors earn a commission, or contingent fee, for any payments then made on those loans.

The Department charges each borrower the cost of the commission earned by the contractor, and applies payments from that borrower first to defray the contingent fee earned for that payment, and then to interest and principal owed on the debt.

As a result, the amount needed to satisfy a student loan debt collected by the Department's contractors will be up to 25 percent more than the principal and interest repaid by the borrower.

On each billing statement, the Department projects an estimate of the total amount needed to satisfy the debt on the date of the statement, including collection costs that would be incurred by payment in full of that amount."  (Emphasis Added).

So while President Obama was hailed for cutting out the middle man by offering direct student loans to college students, he certainly made it up with the graft given to private debt collection companies.

It is obvious that this is the next middle man that must be cut out of the student loan program. 

Termination or restructuring of these contracts would immediately bring in an addtional $1 billion into the U.S. treasury.

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