The Obama administration slashed the commissions paid to private collection companies that chase overdue student loans, reducing an incentive to squeeze borrowers.
The Education Department previously had paid commissions as high as 16 percent of the entire loan amount if collectors persuaded defaulted borrowers to make stiff monthly payments. Starting this month, the fee dropped as low as 11 percent, no matter the payments’ size, according to a copy of a new contract obtained under the Freedom of Information Act.
With $77.4 billion worth of student loans in default, the federal government turns to an army of private collectors to pursue borrowers. These companies, which receive about $1 billion annually in commissions, have faced growing complaints that they insist on high payments, even when borrowers qualify for leniency. Under the new schedule, collectors will no longer have an incentive to avoid offering affordable payments tied to borrowers’ incomes.
“It’s a big deal,” said Persis Yu, a staff attorney with the Boston-based National Consumer Law Center. “It will make life easier for borrowers. We’re not setting people up to fail.”
Federal-aid law requires collectors to offer “reasonable and affordable” payments, so debtors can rehabilitate their loans, repairing their credit and making good on what they owe taxpayers.
Under Education Department contracts, collection companies rehabilitate a defaulted loan by getting a borrower to make nine payments in 10 months.
The law mandates no minimum payment for a borrower to enter a rehabilitation program, and collection companies may take borrowers’ finances into account.
Yet, under the old contract, the companies received a much higher commission if borrowers made a minimum payment of 0.75 percent to 1.25 percent of the loan each month, depending on its size.
For example, a $20,000 loan would require payments of about $200 a month for the collection company to get its full commission. Then, the collector would receive 16 percent of the loan amount — or $3,200. If the payment fell below that figure, the collector got an administrative fee of $150.
That differential provided an incentive for collectors to insist on the amount triggering the commission and fail to tell borrowers they could pay less, Yu said. Under the new contract, borrowers with high debts and low incomes could get back on track while making payments of as little as $5 a month, while collectors could still make their commission.
The new commission schedule is part of an Obama administration effort to give borrowers a break as student loan debt surpassed $1 trillion amid skyrocketing tuition costs. As of last year, 5.7 million student-loan borrowers were in default, generally meaning they have failed to make payments for 270 days or more.