The work was automated and fast paced: Calls were robodialed, and the delinquent borrower’s account history flashed on the computer screen in Suren’s cubicle. Her job was to engage with the borrower, stick to the script and try to get some money.
Some calls were scary, Suren said: Angry debtors would curse and threaten her, declaring they were jobless and broke. Others were heartbreaking: Borrowers would claim they or their children were terminally ill.
Whatever the story, Suren said she’d have to tell them what would happen if they didn’t pay: The company would take their tax refund and garnish their wages.
After hanging up, Suren sometimes would reflect on her own student loans.
“This is going to be me in a couple of years,” she remembers thinking. After a year, she quit.
The federal government holds roughly 90 percent of the $1.3 trillion in outstanding student loans. That makes the Department of Education effectively one of the world’s largest banks, but one that rarely deals with its customers. That job has been turned over to private contractors that are paid commissions and sometimes bonuses to collect on student loans.
At first, federal employees in the Department of Education handled student loan collections, but starting in 1981, the department began contracting with private companies to take over some debt collection.
After Sallie Mae’s privatization in 1996, investors poured into this field. Private equity funds controlled by JPMorgan Chase & Co. and Citigroup bought established debt collection firms, as did a fund led by one of Mitt Romney’s former partners at Bain Capital. Some family-owned debt collectors, such as NCO Financial Systems, became hot properties and would be sold to one private equity fund after another.
Today, 1 in 4 borrowers are behind in their payments, with nearly 8 million in default.
As borrowers struggle to make their payments, student debt has become the go-go sector of the debt collection industry. Under Education Department contracts, the more collectors recoup, the more they earn. Contractors are expected to make more than $2 billion in commissions from the government this year.
With the stakes so high, complaints about overzealous debt collectors have soared. Federal and state agencies have fined contractors millions for misconduct in harassing student debtors. Some bad actors have lost their contracts entirely.
San Francisco graphic designer Brandon Hill said Sallie Mae collectors began calling him at 5 a.m. “yelling and screaming” about his past-due payments. After he complained to state regulators, the barrage of predawn calls stopped. But in 2014, Sallie Mae and Navient sued Hill for immediate payment of $73,000 in student loans, records show.
“I was sued for complaining,” he said. He’s negotiating a settlement.
In a letter to the state, Sallie Mae wrote that the company had “acted appropriately” in contacting Hill. The 5 a.m. calls occurred because Hill’s cellphone has a Virginia area code, so collectors assumed he was on the East Coast, a Sallie Mae official wrote.
Retired University of Cincinnati professor Mary Franklin said collectors threatened to seize her disability insurance benefits because she fell behind on a student loan for the first time in 20 years. She said the threats occurred after she became ill in 2002.
“I tried to explain to them that I was ill and I was still coming out of it,” she said. “They said the federal government (doesn’t) care.” She managed to resume payments.
Congress revised the student loan program in 2009 to take back control of issuing federal loans. However, it left intact the industry that had grown up to service and collect on the loans. The House Committee on Education and Labor went out of its way to stress in its report that “the legislation does not force private industry out of the system.”
In 2015, the Obama administration launched a pilot program to test whether federal employees could effectively take over the job of collecting on defaulted student loans, while being more helpful and less aggressive than private collectors.
To Deanne Loonin, who monitored student debt for years for the National Consumer Law Center, the Treasury Department experiment is focusing on one of the biggest problems borrowers confront.
“We need to eliminate the private collection agencies from this process,” she said. “They are incentivized just to collect money, not to work out ways that might be better for the borrowers. We need to see what else might work.”
Student debt becomes the worst kind of debt
This year, presidential candidates Hillary Clinton and Donald Trump are promising reforms. But most proposed fixes offer limited relief for the 42 million Americans already saddled with student loans, such as Anita Brewer.
Brewer wanted to be a fashion designer when she enrolled at the Los Angeles campus of American InterContinental University in 2005.
The school was hot. Its parent company, Career Education Corp., was beloved by Wall Street. In that era, investment firms saw huge potential for high profits and little risk in owning for-profit schools.
Their business model was simple: The more students they recruited who were eligible for a federal loan, the more money they made. Never mind that many students dropped out before earning a diploma and were left with debts they couldn’t repay.
Brewer had no idea that Career Education’s schools already were a magnet for complaints about poor academic quality, massive student turnover, high student debt and securities fraud.
The year she arrived, the trouble exploded into view. An accrediting agency put the school on probation. Then, in 2008, the company announced that it would close the L.A. campus. By that time, Brewer had taken out $60,000 in federal and private loans.
She tried to transfer, but other colleges refused to accept her credits. With no degree, she worked at a series of low-paying jobs as interest on her student loans ballooned. Before long, Sallie Mae was demanding $1,000 a month in payment, an amount nearly equal to her monthly earnings.
She applied to a federal program that forgives student loans when a college shuts down. But the U.S. Department of Education contended that Brewer didn’t qualify because technically, the school hadn’t shut down – it still had campuses in the South and overseas. Meanwhile, the balance on her loans has risen to $157,000, and some were in default.
“I worked so hard not to be in this situation right now,” she said. “I sacrificed so much to go to school and get an education. But I can’t get an apartment, I can’t get a cellphone, I can’t get a car, I can’t get anything because my credit is shot to hell.”
In an earlier time, Brewer might have gotten some relief by going to bankruptcy court. That’s where Americans seeking a second chance long have been able to get a reprieve from their crushing debt. degrees
