Guest Post: Getting Rid of Collection Agencies Part 2

By Deanne Loonin

As I argued last week, the growing reliance of the federal government, student loan guaranty agencies, and colleges on private collection agencies not only to collect on student loans but to resolve disputes and provide repayment information to financially distressed borrowers has been a disaster. Debt collectors are not adequately trained to understand and administer the complex borrower rights available under the Higher Education Act, and the government doesn’t provide sufficient oversight over their activities.

I firmly believe that the time has come to eliminate private collection agencies from the federal student loan programs. The Department of Education, for example, should terminate its contracts with these agencies and, like the I.R.S., hire in-house staff to resolve disputes and collect debts.

I fully recognize, however, that these steps will not be accomplished overnight. So today, I am recommending interim steps the government and other loan holders can take to help protect borrowers’ rights during the collection process. Most of the following steps do not require Congressional or regulatory change but rather a commitment to provide respectful and accurate services to borrowers and to oversee the process so that violations are punished at all levels of the organization:

Loan holders should limit the files they send to collection agencies

At a minimum, borrowers that are already subject to extreme collection programs such as offset and have no other assets should not be pursued by collection agencies and should not be charged collection fees. If a borrower informs a collection agency that he believes he has a defense to the debt, that the amount is wrong, or that he wants to request a hardship waiver, the file should be immediately sent back to the loan holder.

Collection charges should be limited to only those fees that are bona fide and reasonable and actually incurred

In addition, the amount of fees to be charged must be clearly written in the promissory note. In no event should fees be added to the principal, a standard practice these days known as capitalization, which balloons loan balances and makes it even harder for many borrowers to make a dent in their debts. Reasonable collection fees should be charged only when actual costs are incurred and in no case for government offsets or wage garnishments. 

Student loan collectors should be required to report not only on dollars collected, but also on how they are complying with the notice and hearing requirements in federal law

The government interest in collecting debts must be properly balanced with protection of borrower rights and respect for due process. The Debt Collection Improvement Act (DCIA) requires borrowers to get notice of collection efforts and gives them other rights, such as the right to a hearing and to get a copy of the loan file. The Fair Debt Collection Practices Act (FDCPA), which applies to nearly all third party debt collectors, protects consumers from illegal, unfair and abusive debt collection practices regardless of whether consumers owe the underlying debts.

The Department must stop delegating inherently governmental functions, such as conducting fair hearings, to third party debt collectors

There is an inherent conflict of interest in allowing collection agency officials to conduct and make hearing decisions. The hearing judges must be neutral and independent.

The Department and its agents should make publicly available the process for handling complaints against collection agencies and any disciplinary actions taken against those agencies

The Department and other loan holders often excuse examples of bad behavior as “anecdotal” and point to low volumes of borrower complaints. This excuse does not take into account the lack of a clear borrower-friendly complaint process. The Department’s web site and other materials should give clear information about how to lodge complaints about collection agencies.

All collection letters should be required to include information about exemptions and other borrower rights

Collectors should be required, for example, to inform borrowers that they might qualify for a discharge if they are totally and permanently disabled and that SSI payments are completely exempt from federal benefit offsets. The letters should include basic information about borrowers’ rights and refer them to a neutral resource where they can find out more.

Conclusion

These are recommendations to help fix a broken system and to help ensure that borrowers can truly access the protections that exist. Of course, much more needs to be done to protect all borrowers from abusive collection tactics and to restore a real safety net for the most vulnerable borrowers. At a minimum, this includes restoring a statute of limitations for government student loan collection and bankruptcy rights for student loan borrowers. It is also critical to amend the exemption laws so that Social Security payments are once again protected from offset and to protect earned income tax credits.

The limitless pursuit of vulnerable borrowers has serious human and financial costs. The cost of collecting from those who have little or no income or assets is often greater than the meager amounts, if any, that come back to the government.

Deanne Loonin is a staff attorney with the National Consumer Law Center and the Director of the Center’s Student Loan Borrower Assistance Project. She focuses on consumer credit issues generally and more specifically on student loans, credit counseling, and credit discrimination. She is the principal author of numerous publications, including “Too Small to Help: The Plight of Financially Distressed Private Student Loan Borrowers,” and “Income-Based Repayment: Making it Work for Student Loan Borrowers.” Her views are her own and do not necessarily reflect those of the New America Foundation.