Washington Monthly - September/October 2012 - 50

tract agents deliver a benefit to which she is clearly entitled by law. Meanwhile, because her loans have become delinquent while she’s waited for the department to refinance her loan, her credit is shot. The experience, she says, has been “maddening.” She no longer trusts that the department’s servicing representatives have her best interest in mind. And get this: assuming she ever gets approved for IBR, she’ll have to repeat the application process every year, according to current law, or be automatically kicked out of the program. hy do the servicers provide such lousy service? One reason is basic institutional incompetence, says the National Consumer Law Center’s Loonin. But just as important, she says, is the complexity of the regulations that govern the terms and procedures of the various student loans. Even servicing representatives who are sincerely trying to help “really don’t understand the programs,” says Loonin. And, of course, if the loan professionals have trouble grasping the nuances of all the loan programs, what chance

We could follow the lead of countries like Australia, New Zealand, and the United Kingdom and create a single student loan repayment system that is entirely based on a borrower’s future income.
do average borrowers have? (For an as-simple-as-we-canmake-it explanation of federal student loan repayment options, see “Got Student Debt?,” page 49.) If loan servicers can be exasperating to deal with, the debt-collecting companies can be downright scary. The federal government contracts with twenty-three such firms to collect on loans in default, paying the industry hundreds of millions of dollars annually in fees and commissions. Welldocumented horror stories abound about how these collection agencies routinely fail to inform borrowers about repayment options to which they are entitled, demand excessive payments, refuse to provide documentation to back up their claims, call at all hours, harass borrowers’ friends, family members, and neighbors, and generally lash out in abusive and threatening ways. One of the most aggressive loan-collection firms is Pioneer Credit Recovery, a subsidiary of student loan giant Sallie Mae. Consumer Web sites are full of complaints about the company’s practices. Meanwhile, former Pioneer collectors recently told Bloomberg Businessweek that the company has a “boiler room” culture, where low-paid workers are richly re50 September/October 2012

warded for squeezing the most money they possibly can out of defaulted borrowers. Those who miss their targets are under constant threat of losing their jobs. “When you’re making eight bucks an hour, it’s all about the bonuses,” said a former Pioneer employee who worked at the collection agency from 2004 to 2007. Despite such complaints and accusations, Pioneer regularly scores at or near the top of the rankings the Education Department uses each quarter to reward the best performing of its debt-collection contractors with new accounts and generous bonuses. Why? Because the rankings are based almost entirely on the amount of dollars collected, with little regard for how borrowers are treated. In theory, the department could discipline collection agencies that are known to abuse borrowers by cutting the companies’ fees or ending their contracts. But in 2003, the Department of Education’s inspector general released a disturbing report that took the department to task for its complete and utter failure “to track and monitor complaints” that were made against the collection agencies. By neglecting to follow its own detailed policies for reviewing complaints, the Education Department, the report concluded, didn’t have any idea whether its contractors “were appropriately servicing borrower accounts and adhering to applicable laws and regulations.” The National Consumer Law Center’s Student Loan Borrower Assistance Project recently found that little has changed in the intervening years. In a report it released in May, the group revealed that the Department of Education and most of the collection companies it hires make it unnecessarily difficult for defaulted borrowers to even lodge complaints. “As long as the Department and its contractors can deploy extraordinary collections tactics to recover federal loans, borrowers must have an accessible way to register their dissatisfaction,” said the report. n recent months, the Obama administration has taken some steps to address the mess on the back end of the student loan system. The Department of Education has proposed new rules that would require all collection agencies to determine how much income and expenses defaulted borrowers have—something the department hasn’t required them to do until now—and to then craft repayment plans based on the borrower’s ability to pay rather than demand minimum payments based on the original loan amounts. The president has also ordered the department to set up a system to allow borrowers to apply for income-based repayment online without having to go through servicers. But while these reforms might provide easier paths for many struggling borrowers, they largely leave the current system and its many dysfunctions in place. Borrowers will still be reliant on the servicers to tell them about their repayment options, including IBR. Collection agencies will still be paid based on how much revenue they can extract from defaulted borrowers, which means they will

Washington Monthly - September/October 2012

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