Friday, September 14, 2012

Student Loan Defaults and Loans Outstanding ... Our Aggressive Benevolent Government Giveth and then Taketh Away

It must be hard, if not impossible, to get turned down when applying for a student loan these days. In fact, the total outstanding balance due on student loans is now more than $1 trillion.

And a substantial part of that trillion dollars is now in default. And many of those defaulting are the ones who don't graduate despite borrowing lots of money to go to college.

But the interest rates on student loans are very low, since Congress kept them at 3.4% instead of letting the rate increase to double that as previously scheduled. That said, people can't pay anything at all if they have no money due to no jobs.

What the Congress didn't do, therefore, was make the loans any easier to pay off, since unemployment remains high and lots of students don't ever come close to graduation day. That means they owe, they owe, but off to work don't go.

But at least one group is doing well with student loans -- the debt collectors.

Debt Collectors Cashing In on Student Loans has this to say:

"As the number of people taking out government-backed student loans has exploded, so has the number who have fallen at least 12 months behind in making payments — about 5.9 million people nationwide, up about a third in the last five years.

In all, nearly one in every six borrowers with a loan balance is in default. The amount of defaulted loans — $76 billion — is greater than the yearly tuition bill for all students at public two- and four-year colleges and universities, according to a survey of state education officials.

In an attempt to recover money on the defaulted loans, the Education Department paid more than $1.4 billion last fiscal year to collection agencies and other groups to hunt down defaulters. Hiding from the government is not easy. . . .

Unlike private lenders, the federal government has extraordinary tools for collection that it has extended to the collection firms. Ms. Cordeiro (student loan borrower in default) has already had two tax refunds seized, and other debtors have had their paychecks or Social Security payments garnisheed. Over all, the government recoups about 80 cents for every dollar that goes into default — an astounding rate, considering most lenders are lucky to recover 20 cents on the dollar on defaulted credit cards.

While the recovery rate is impressive, critics say it has left the government with little incentive to try to prevent defaults in the first place. . . .

There is no statute of limitations on collecting federally guaranteed student loans, unlike credit cards and mortgages, and Congress has made it difficult for borrowers to wipe out the debt through bankruptcy. Only a small fraction of defaulters even tries.

“You are going to pay it, or you are going to die with it,” said John Ulzheimer, president of consumer education at, a credit monitoring service.

The New Oil Well? . . .

With an outstanding balance of more than $1 trillion, student loans have become a silver lining for the debt collection industry at a time when its once-thriving business of credit card collection has diminished and the unemployment rate has made collection a challenge. . . .

Mark Russell, a mergers and acquisition specialist, writing in the same trade publication as Mr. Ashton, the consultant at the N.Y.U. protest, suggested student loans might be a “new oil well” for the accounts receivable management industry, or ARM, as the industry is known. 

“While the Department of Education debt collection contract has been one of the most highly sought-after contracts within the ARM industry for years, I believe it is now THE most sought-after contract within this industry, centered within the most sought-after market — student loans,” Mr. Russell wrote last October.

In 2010, Congress revamped the student loan program so that federal loans were made directly by the government. Before that, most loans were made by private lenders and guaranteed by the government through so-called guarantee agencies. . . .

The average default amount was $17,005 in the 2011 fiscal year. . . . A loan is declared in default by the Department of Education when it is delinquent for 360 days. . . .

Some borrowers say they do not see a path out of default, because they are sick, unemployed or facing so much debt they cannot imagine any way to pay it off. Some have defaulted on private student loans, too. . . .

Patrick Writer of Redding, Calif., received a certificate in computer programming in 2008 from Shasta College, a community college. But he graduated in the midst of the financial crisis and has not been able to find a job as a programmer. He defaulted on $12,000 in federally backed loans in 2009.

“If you can’t make your utilities and your rent, your student loan payments are almost goofy, inconsequential,” said Mr. Writer, who is 57.

But Mr. Writer said he had come to realize what it meant to have a student loan that was guaranteed by the federal government. “It’s the closest thing to debtor prison that there is on this earth,” he said. . . .

On paper, there are few good reasons struggling borrowers should go into default, or stay there, since there are many programs to help them keep up with payments. In addition to income-based repayment, there is forbearance for temporary financial woes and different types of deferment for issues like unemployment, military service and economic hardship. But the challenge of creating the right incentives — and getting collectors and debtors to embrace them — has bedeviled Congress and the Department of Education.

Critics say the result has often been contradictory incentives that provide little help to struggling borrowers. For instance, loan servicers are paid $2.11 a month for each borrower in good standing, but only 50 cents a month for borrowers who are seriously delinquent, too little to devote much time to them.

Guarantee agencies are paid a default aversion fee, equal to 1 percent of the loan balance, if they prevent a borrower from going into default. But the same agencies get paid much higher fees for collecting or rehabilitating a defaulted loan.

And debt collectors are rewarded primarily for collecting as much as possible, not for making sure a borrower can afford the payments, critics say. . . .

In a June memo, President Obama wrote that “too few borrowers are aware of the options available to them to help manage their student loan debt.”. . .

“We’re trying to balance two priorities, working with students who have fallen on hard times while trying to be good stewards of the taxpayers’ dollar,” said Justin Hamilton, a Department of Education spokesman. “We’re always going to be in a process of continuous improvement.”

Lindsay Franke, of Naugatuck, Conn., is among the borrowers taking advantage of income-based repayment. While her monthly payment is now lower, Ms. Franke, who is 28 and has a master’s degree in business administration from Albertus Magnus College, said the program had not changed a crushing reality: she still owes too much money and makes too little to pay it off. A marketing coordinator for a law firm, she filed for bankruptcy last year because she could not afford her mortgage, car payment and student loans. She lost the house, but still owes $115,000 in student loans, both private and federal. Under income-based repayment, she pays $325 a month on her federal loans; she also pays $250 a month on her private loans.
“I will never have my head above water,” Ms. Franke said."

Summing Up

As usual, the law of unintended consequences is alive and well when government decides to "help" save the middle class.

We loan money to anybody, it seems, to attend college. Then when they don't graduate and aren't able to service the loans, we send the bill collectors after them. Or even if they do graduate and are unable to get a good job, we still send the bill collectors after them.

Too many colleges have a "butts in the seat" approach to college attendance. If they increase enrollment, they increase their revenues from loans, Pell grants and other forms of payment. And they have no skin in the game either.

Only the borrowing students and the money lending taxpayers have financial obligations.

That's really a great example of our government run amok. At least that's my view.

And a government and system of higher education which has misplaced priorities as well.

Why in the world aren't we screening applicants better before enrolling them in colleges and granting them loans which they very well may end up being unable to service?

And why are we not allowing them to discharge their student loan debts when they enter bankruptcy?

We need to get out a clean sheet of paper, and start all over again.

That's my take.

Thanks. Bob.

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