The Industry of Student Loans

For millions of former students in American, a ringing phone always causes a moment of panic. They consider the number before answering. Maybe they’ve already given it a contact name like “Don’t Answer” or just “SL.” Staring at the screen in silence, they let machine answer, knowing, already, what the message will be ….

by RC Cipriano man bench

A whopping seven million former students are now in default on federal loans, with an additional 3 million at least 30 days behind on their payments. According to U.S. government data, that’s a record $115 billion of debt, a number that has grown almost 25 percent in two years.   Taxpayers are left shouldering that mountain of debt, but for some it represents nothing more than job security.

In the decades since the government began offering loans, a multilevel industry has grown that thrives on student debt. From the forprofit schools to the Department of Education’s “Default Management Collection Services” (DMCS) team, the business of student loans doesn’t always seem to be about the student. Rising costs of college and flat family incomes have caused this convoluted system to flourish. Last year the government paid more than $500M to the DMCS providers, alone.  While the providers earn only $13 for each borrower they successfully keep out of default, the collection branches of their own companies can make more than $2,000 if they get the person into repayment after they have already defaulted.  Would you rather have $13 or $2000?

The loan program began in 1958 with the goal of encouraging young people to attend college. No one predicted that it would turn the Education Department into one of the largest financial institutions in the country. If it were a bank, it would rank fifth in assets in the U.S. The government now disburses about $100 billion in education loans annually, more than double what the distribution was in 2007. Altogether, there is now more than $1.2 trillion in government-backed education debt.

Most students fully intend to repay their debts, assuming that their education will lead to a successful job. The reality is that there is almost a 12% default rate within three years. That rate does not include students who are in forbearance or deferment. Students are required to start repaying loans six months after leaving school, and are considered in default if they haven’t made a payment for at least 270 days.

Older loans were originated by private lenders and backed by the government. In 2008, during the financial crisis, the government purchased $112 billion of commercially originated debt. Congress changed the loan system again in 2010, requiring the government to originate all federal student debt.

Andrew Pons

Student-debt servicers process monthly payments for the government, and act as the main point of contact for borrowers. The Education Department awarded servicing companies $576 million in fees in the last fiscal year. Firms typically earn monthly fees based on the status of the loans they service: $2.85 for those in repayment, $1.05 if borrowers are in school, and only 45 cents when they’re delinquent 361 days or more.

That’s when the collection companies step in. According to the Government Accountability Office, they helped recover about $9 billion from 2011 to 2013.

When private collections companies can’t recover the money, the Treasury Department can garnish Social Security, tax refunds, or wages. The Department said it had offsets of $2.27 billion for education debts in fiscal 2015.

Congress has mandated that schools with default rates of 30 percent or higher for three consecutive years lose access to federal loans.  The need to keeping default rates low has spurred yet another niche industry in providing such services to schools.

Calls from these companies may encourage borrowers to take the quickest deferment or forbearance, even though that might not be the best choice in the long run. It’s not their job to help the student, though; it is their job to keep the loan money coming in to their employer college.

 Meanwhile, the former student, unable to pay the debt, often feels helpless to do anything but sit and watch the phone ring … and ring … and ring.

photo credits: sitting man by RC Cipriano, money by Andrew Pons