Many borrowers are struggling to pay off their student loans, and the debt collection industry is cashing in. 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.
Unlike private lenders, the federal government has extraordinary tools for collection that it has extended to the collection firms. Ms. Cordeiro 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.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 SmartCredit.com, a credit monitoring service.
Business is booming at ConServe, a debt collection agency in suburban Rochester. The company recently expanded into a neighboring building. The payroll of 420 is expected to double in three years.“There is great opportunity,” said Mark E. Davitt, the company’s president and founder.Where some debt collection firms have made their fortunes collecting on delinquent credit cards or hospital bills, ConServe is thriving because of overdue student loans, a large majority of its business.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. To recoup unpaid loans, the federal government, private lenders and others have turned to collection agencies like ConServe.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.Of the $1.4 billion paid out last year by the federal government to collect on defaulted student loans, about $355 million went to 23 private debt collectors. The remaining $1.06 billion was paid to the guarantee agencies to collect on defaulted loans made under the old loan system. That job is often outsourced to private collectors as well.
At ConServe, in a room of cubicles with college pennants lining the walls, collectors comb through databases and public records hunting for contact information for borrowers. If ConServe reaches a borrower who refuses to cooperate, the company considers garnisheeing wages or withholding a government check, which requires approval from the Department of Education.Dwight Vigna, director of the department’s default division, says the government does not give up easily. If a vendor like ConServe has not found a borrower in six months, the department turns the case over to another collection agency.In fiscal 2011, the department wrote off less than 1 percent of its loan balance, for such things as death or disability of a borrower.“We never throw anything away,” Mr. Vigna said.
Arthur Chaskin, a disabled carpenter, can attest to the government’s long memory.Since he left college in the late 1970s, Mr. Chaskin has largely ignored his student loans — until June, when a federal judge ordered him to turn over $8,200.Mr. Chaskin had borrowed $3,500 in federally guaranteed student loans to attend Northwestern Michigan College, a community college. He did not graduate. The federal government sued him in 1997, but over the next 15 years he made only five payments.Last January, a lawyer in Michigan working on contract for the government was alerted to a credit check for Mr. Chaskin. The lawyer filed a garnishment order and discovered a brokerage account with nearly $20,000 that Mr. Chaskin said he had opened with disability checks.By the time the government caught up with him, Mr. Chaskin owed more than $19,000 in accumulated interest and penalties, but the judge reduced the amount to $8,200 after Mr. Chaskin pleaded for a break.“If you wait long enough, you catch people when their guard’s down,” said the lawyer, Charles J. Holzman, who was rewarded with more than 25 percent of Mr. Chaskin’s payment.
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.