The Trump Administration’s Education Department recently announced its plans to cease having private debt collectors collect late student loans. Currently contracted student loan servicers will take over those duties instead of outsourcing them to private companies. This announcement comes after the department recently ended contracts with two debt collection companies the previous month.
What Impact Will This Have on Borrowers?
While private debt collectors generally focused on getting a borrower current on a defaulted portion of their loan in the past, student loan servicers are expected take a longer-term approach. One expectation is earlier intervention before borrowers fall too far behind in the first place, according to The Washington Post.
This change is just one of many prospects in the Trump Administration’s promised overhaul of the federal student loan system. However, it won’t happen overnight. No timeline has been set for the switch yet. Until the change is implemented, private debt collectors that have been handling defaulted student debt will continue to do so. Borrowers who have trouble in dealing with debt collectors may still need to find a solution with a private company for the time being.
The use of private debt collectors for defaulted student loans has long been criticized by consumer advocates. The issue isn’t that debt collectors are trying to recoup money that’s owed. The criticism falls on collectors that don’t act to help struggling borrowers find a real solution to the root problem.
What’s more, some companies have faced scrutiny over alleged harassment, improper conduct, and questionable practices. For example, some critics, like Sen. Elizabeth Warren (D-MA), have accused the private debt collection companies of lying to debtors that are contacted for collection payments.
“Private collection agencies are expensive, not well incented to help borrowers, and complicate the process by taking defaulted students out of one system and putting them into another,” said Clare McCann, who once served as a policy adviser at the Education Department, to The Washington Post.
Consumer advocates hope this will create an environment of better customer service aimed at helping borrowers succeed with their loan payments long term instead of just focusing on the month-to-month payment coming in. And when a borrower is late on that first payment, they will have options to implement before default provided by the student loan servicer.
What the Debt Collectors Say
While they certainly have their critics, debt collectors argue they are working within the law. The trade group that represents debt collectors, the ACA International, said the employees follow all the laws required by lawmakers.
“The accounts receivable management industry is critically important to the overall success of the U.S. economy, and to consumers’ ability to access credit,” chief executive of ACA International Mark Neeb told The Washington Post.
But critics also say debt collectors are expensive to hire for taxpayers, and they question their ability to get the job done while keeping borrowers from defaulting in the future. It’s estimated that 20 cents of each dollar paid by an impacted borrower goes to the collection costs.
In 2017, approximately $700 million was paid by the federal government in debt collection fees. That was to handle the collections for just under 7 million borrowers who had defaulted on their loans. To put that expense in perspective, that figure was nearly the same as the cost of servicing loans for 33 million borrowers.
Author: Mike Brown
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