Taxpayers Give Billions To Student Loan Collection Companies For No Reason
As President Barack Obama and Former Massachusetts Governor Mitt Romney go back and forth as to how the government-invented student loan crisis should be handled, including preventing student loan interest rates from doubling, a more systemic look at how waste in the system can be eliminated for the benefit of both U.S. taxpayers and student loan borrowers should be taken. Namely, that 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 in 2011 regarding the topic that the Obama administration wanted 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.
Statistical Source: http://www.fsacollections.ed.gov/contractors/ga/stats/090611.htm
U.S. Dept. of Ed. payment policy: http://www.fsacollections.ed.gov/contractors/ga/stats/090611.htm
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