The United States Department of Education building in Washington, D.C.
While the United States government has been relying on debt collectors to help defaulted student loan borrowers get back on track, analysis from the CFPB claims that the money is going to waste.
According to a report by the Consumer Financial Protection Bureau, which analyzed almost 600,000 student loan borrower accounts, over 40 percent of borrowers who dealt with debt collectors after entering default status defaulted on their student loans a second time within three years.
To put this in perspective, the Department of Education has reserved over $4 billion in funding to pay debt collectors since 2013. When these agencies or third parties get a borrower to begin making payments once more, they can earn as much as $1,710 per case. Keep in mind that they retain this payment even if the borrower defaults again.
The government often rewards collectors at 40 times the value of what they actually earn for the government. For example, borrowers who have missed nine payments are considered to be in default. Through the rehabilitation program set up the federal government, their accounts can be in positive standing once again after making nine consistent monthly payments for as little as $5 each. Under the current system, the debt collector is paid a fee of more than $1700 while the Department of Education makes $45 in recovered student debt for this scenario.
For many critics, this is proof that the student loan system needs to be revamped in an effort to do more for distressed borrowers. For example, while many defaulted borrowers can qualify for $0 payments under a federal income-based repayment plan, about 90 percent failed to enroll in these programs. The opportunity to circumvent debt collectors is missed, and it requires the government to shell out more cash on the student debt issue.
The student debt issue is already large enough as is with more than $1.4 trillion in outstanding student debt. On top of that figure, issues have been brought up concerning government expenditure in the past.
A 2016 report by the Government Accountability Office contended that the government underestimated the expenditure of student loan forgiveness through the Income-Driven Repayment (IDR) Program by a whopping 70 billion taxpayer dollars.
At face value, that number seems appalling, but a few optimists offered a different perspective. According to The Student Loan Report, U.S. Rep. Bonamici claimed that the report ignored important considerations such as projected income and tax revenue of the borrowers participating in an IDR program with student loan forgiveness. With this in mind, she contends that its a break even scenario for the government, not a gross, expensive underestimation.
Image Copyright © Christopher Penn