Student Loan Debt Collections Come Up Short

Student Loan Debt Collections Come Up Short

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 past debt collection contract did for the same period of time, but debt collection revenues are nevertheless below the department’s projections.

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

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

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

“Although we are collecting more funds, we are not meeting our own internal goals and expectations for recoveries,” a department spokesman told “We continue to analyze the data and look for ways to enhance the department’s recovery efforts.”

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 proportion 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 scarce 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.

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 complete payments of an agreed-upon amount over a period of 10 months.

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 empowered payment-postponement periods.

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

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

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 additional an “unreasonable” 25-percent collection fee to their student loan account balances before turning the delinquent loans over to a third-party collection agency.

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

The estimate 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.

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