Student Loan Debt Collections Come Up Short

According to figures released by the Education Department, 23 debt collection agencies currently employed to recover defaulted student loans have recovered more than $3.8 billion in previously uncollected revenue, a 41-percent increase over the previous debt collection contract.

The U.S. Department of Education is reporting that its current student loan debt collection contract produced more revenue in the first 15 months of operation than the previous debt collection contract did for the same period of time, but debt collection revenues are still below the department's projections.

The newly recovered revenues include payments gathered via all sources, including litigation and student loan rehabilitation efforts. 

"Although we are collecting more funds, we are not meeting our own internal goals and expectations for recoveries," a department spokesman told insideARM.com. "We continue to analyze the data and look for ways to improve the department's recovery efforts."

Despite the jump in recovered revenues, the Department of Education says that its efforts to collect on unpaid federal college loans are still falling short of its projections.

The current Department of Education loan debt collection contract, awarded in 2009, includes new incentives for top-performing collection firms. Earnings and bonuses for the top performers now include a greater share of the revenues these companies collect.

The Education Department was hoping that these incentives would translate into increased competition among the debt collection firms. To date, that has not been the case, and as insideARM notes, it has been rare to see any one collection company earn the top-performance ranking two quarters in a row.

Of the $3.8 billion in student loan debt that has been deemed "recovered," about $894 million has been classified as "collected," which includes rehabilitated loans.

Once this trial repayment period has been completed successfully, the defaulted student loan is considered rehabilitated and returned from collections to regular servicing. The notice of the default is removed from the borrower's credit record, and the borrower will again be eligible for federal financial aid and federal education loan benefits, including income-based repayment options and authorized payment-postponement periods.

Once rehabilitated, defaulted education loans are no longer subject to wage garnishment or to tax-refund withholding by the Internal Revenue Service.

The Department of Education's student loan rehabilitation program enables borrowers who have defaulted on their federal education loans to "rehabilitate" those loans, putting the loans back in good standing, by making nine on-time full payments of an agreed-upon amount over a period of 10 months.

In the lawsuit, the plaintiffs - all former students at a for-profit culinary arts school in California, which itself was sued by graduates who said the school burdened them with student loan debt and then failed to teach the skills necessary for gainful employment after graduation - claim that Sallie Mae illegally added an "unreasonable" 25-percent collection fee to their student loan account balances before turning the delinquent loans over to a third-party collection agency.

Student loan debt collections among some private-sector lenders are also striking a sour note, but for different reasons. In late February, a federal judge refused to throw out a class-action lawsuit against student loan giant Sallie Mae that accuses the company of illegal debt collection practices.

The judge in the case disagreed and is allowing the case to proceed to trial, although she rejected the plaintiffs' claim that Sallie Mae attempted to collect on their student loan debts unfairly and barred the plaintiffs from seeking relief under either the Consumer Legal Remedies Act or California's Rosenthal Fair Debt Collection Practices Act.

Sallie Mae argued that the 25-percent charge, which it assessed to cover its collection costs, wasn't necessarily unusual and that the class-action suit should be thrown out because the plaintiffs weren't specific enough in their claim of "unreasonable costs."