New contract provisions between private debt collection agency and the U.S. Department of Education may begin to limit the amount private debt collection agencies can receive in commissions once a loan has been “rehabilitated.” According to a representative of the Department of Education, smaller commissions may be given to private debt collectors who have persuaded defaulted federal student loan borrowers to make loan payments.
Some say that the lower commission rates may benefit defaulted loan borrowers by providing a greater incentive for private debt collectors to work with borrowers in default by providing them with all the options available to them, not just the options that give the debt collector the greatest likelihood of receiving the previous 16-percent commission rate. However, there are still restrictions that will limit what a debt collector can obtain under the Fair Debt Collection Protection Act (“FDCPA”).
Student loan borrowers go into default once they have 270 delinquent payments. Once 360 days have passed without payment, the Department of Education sends the loan to a private collection agency hoping that they will have greater success in getting borrowers to pay the loans back. If a private collection agency is successful in getting a defaulted borrower to make nine of 10 consecutive monthly payments, the loan is considered rehabilitated.
Once the loan is rehabilitated, the agency receives a commission that is based on the total amount of the loan that has been rehabilitated. An example of this is if $1,000 is paid back on the loan in nine months, and the total amount of the loan that is back in repayment is $10,000, then the collection agency receives a commission on the $10,000 that will now be paid back.
A report issued by the National Consumer Law Center stated that high commission percentage rates encouraged private debt collection agencies to compete, leading to the greater use of aggressive debt collection techniques. These tactics may be considered abuse or deceptive, violating the FDCPA.
Additionally, the collection agencies attempted to get the most money possible. This stopped them from informing borrowers about lower payment options, including Income Based Repayment. Other problems with student lenders using collection agencies include confusion by the debtor on who is collecting on the debt, making it possible for a collection agency to misrepresent itself as the government, and the oversight of the government on collection agencies tends to be weak. This could bring civil liability for debt collectors if they are breaking the various provisions of the FDCPA as noted above in the links provided.
The only loans that the new commission structure applies to are federal student loans that are backed by the government (private loans are not included). The old commissions were 16-percent of the rehabilitated loan amount. Now the commissions can be as low as 11-percent and will not apply to all defaulted federal student loans. It is not yet clear what factors will be used to determine when the lower commission will apply. The new commission structure has been put in placed along with the implementation of Income Based Repayment plans.
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