Student Loans: Proposal Could Do Away with Costly Debt Collectors

U.S. lawmakers may overhaul the lucrative but controversial debt-collection system for federal student loans, creating automatic withdrawals from delinquent borrowers’ paychecks.
Since 2007, the number of student-loan borrowers nationwide who are at least 12 months behind in making payments on their student loans has increased by nearly one-third. That amounts to a fertile field for debt collectors hired by the U.S. Department of Education to get defaulters to pay up, one way or another.
These debt collector have a remarkable track record, with access to methods that private debt collectors envy. Student loan debtors have had tax refunds seized, and their paychecks or Social Security payments garnisheed.
But these debt collecotrs charge fees as much as 25 percent to the borrowers’ loan balances, creating an even deeper student-loan debt.
In all, the government recoups about 80 cents for every dollar that goes into default, compared to 20 cents on the dollar recovered on average on defaulted credit cards.
Bloomberg reports that Wisconsin Republican Representative Tom Petri plans to introduce a bill that would require employers to withhold payments from wages, similarly to how thay collect overdue taxes. Payments would be capped at 15 percent of borrowers’ income after basic living expenses.
Under the new system, the government would no longer need to hire private debt-collection companies and pay the high recovery fees.

One thought on “Student Loans: Proposal Could Do Away with Costly Debt Collectors

  • December 10, 2012 at 10:32 am

    Student debt is stunting the growth of the economy. Student loans have increased by 275% over past decade. As the next generation graduates from college, they are plagued by insurmountable debt that places demands on their income, limiting their ability to spend their earnings in ways that stimulate the economy.

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