Jason Gallaher from the Northridge Daily in CA reports on April 3, 2013 this interesting article on commissions and collections of defaulted loans.
Private collection agencies and the U.S. Department of Education remain unclear about the specifics on their new contract conditions that began in March to limit private debt collection agency commissions.
According to a representative of the U.S. Department of Education, who wished to remain on background, private debt collectors may now receive a smaller commissions on defaulted federal student loan borrowers they persuade to make loan payments.
Dr. Linda Bradley, assistant professor of family and consumer sciences, said lower commissions could benefit loan borrowers in default.
“This may provide (private debt collectors) with a greater incentive to work with borrowers in default and provide them with all the options that are available to them and just not give borrowers options that offer the greatest likelihood of the debt collector receiving the 16 percent commission,” Bradley said.
The National Consumer Law Center issued a report that described how the higher commission percentage encouraged competition between the 23 private debt collection agencies the federal government contracts with, causing them to be more aggressive in their collection techniques.
The report also stated that this meant collection agencies tried to get the most money possible, preventing them from telling borrowers in default about lower payment options, such as Income Based Repayment.
Nikki Lavoie, a spokesperson for Pioneer Credit Recovery, owned by Sallie Mae, said they work individually with borrowers in default regardless of commission.
“We work one-on-one with defaulted federal student loan customers to offer authorized rehabilitation programs scaled to their needs, helping them return the money they borrowed to American taxpayers,” Lavoie said. “I encourage (anyone) to be in touch with the Department of Education to discuss any other questions.”
A student loan borrower goes into default after 270 days of delinquent payments. When 360 days have passed with no payment, the Department of Education will service the loan to a private collection agency in the hopes that they will be more successful getting borrowers to pay back their loans.
If a private collection agency is able to get a defaulted borrower to make nine out of 10 consecutive monthly payments, that loan then becomes rehabilitated, and the agency receives a commission based not on the amount the borrower repaid, but on the total loan amount that has been rehabilitated.
For example, if the defaulted borrower paid back $1,000 in nine months, but the total amount of the loan that is back in repayment is $10,000, the collection agency will receive a commission based on the $10,000 now being paid back.
The new commission structure is only for federal student loans backed by the government. Private loans are excluded.
Commissions used to be 16 percent of the rehabilitated loan amount, but can now be as low as 11 percent.
The 11 percent commission will not apply to all defaulted federal student loans. The Department of Education has not made it clear what factors will determine when a loan will be eligible for the lower commission rate.
Representatives of private debt collection agencies were similarly unclear about details in the commission change and how it would affect their collection practices.
Mark Boeder, director of marketing at the private collection agency Account Control Technology, Inc. responded, but said he was unable to provide details about the commission arrangement due to the company’s contract with the U.S. Department of Education.
According to the representative of the Department of Education, new commission structures have been put in place with the implementation of Income Based Repayment plans, which factor how much a borrower will make in loan payments based on how much they earn each month.
John Darakjy, assistant director of student financial and tax services at CSUN, said the university uses private collection agencies when its methods of collection do not receive a response from borrowers.
“We send out emails to (defaulted borrowers),” Darakjy said. “If they respond, we try to help them. If there is no email response, we have to send three collection letters, one month apart. If the matter is still not resolved, periodically we will send (the defaulted loans) to collection agencies.”
Darakjy said CSUN uses the private collection agencies Account Control Technology, Inc. and ConServe to handle defaulted loans. He said it is up to the collectors to decide for themselves what the best strategies are for collecting a loan.