Home > 2015 > Students

The Government Fires a Few Debt Collectors, But Completely Misses the Point

Advertiser Disclosure Comments 0 Comments

Some surprising news on the student-loan front: The U.S. Education Department announced that it would terminate the contracts of five of its 22 debt-collection company subcontractors. Per the department’s press release, the soon-to-be ex-collectors made “materially inaccurate representations to borrowers about the [government’s] loan rehabilitation program” and also what borrowers could expect to be reflected on their credit reports.

How ironic. The ED is sanctioning firms—supposedly those it had carefully selected in the first place—for aggressive practices the department arguably encouraged with the contracts it hands out.

Collections companies are in the business of recovering every last nickel and dime from severely past due and defaulted debtors. The means by which they may accomplish that task is a matter for the companies to decide as long as they don’t break any laws along the way.

Sounds simple enough.

But what if the department that subcontracts this work also arms these companies with tools that give them an extraordinary leg up in collecting what’s due — such as the ability to divert (via garnishment) payments from Social Security, Supplemental Security Income, Veterans’ Benefits, Civil Service and Federal Retirement and Disability Benefits, Military Annuities and Survivors’ Benefits, and Federal Emergency Management Agency/Federal Disaster Assistance—and pay them bonuses on top of that?

And what about the apparent conflict of engaging collections companies that are corporately affiliated with the loan-servicing firms that failed to prevent borrowers from missing so many payments in the first place? In fact, what if the loan-servicing and debt-collections companies were once part of conglomerates that originated, owned and/or managed some of the same loans?

Sure, it’s a really good thing that the feds have at long last come around to taking action against these collectors, but will this really solve the problem?

I ask because a little less than half of all student debts that are in repayment at this time represent legacy loans made under the discontinued (2010) Federal Family Education Loan program—contracts that were originated in the private sector, guaranteed by the federal government and are now, to a meaningful extent, securitization collateral for the benefit of God knows how many investors in God knows how many places. As such, I would think it’s the loan servicers that should be drawing the ED’s attention—even more than the collectors.

Servicers are responsible for the day-to-day administration of the loan portfolios entrusted to them—activities that include the routine collection of non-serious, past-due payment amounts (generally, payments that are fewer than 90 days delinquent). Most important, they’re being paid, in part, to prevent these delinquencies from worsening so that the owners of the loans are spared the added expense of hiring debt collectors (hence the concern about affiliated companies getting paid twice for working the same contract).

More fundamentally, though, is the question of the entity that’s being served. In the matter of the FFEL loans, paying for the day-to-day administration of these contracts is the responsibility of the private-sector lenders and investors who own them. But let’s not lose sight of the fact that should these debts become seriously past due to the point of default, the government is contractually obligated to pay them off. By extension, then, the loan servicers should be endeavoring to protect the taxpayers’ interests, right?

Wrong. Because the taxpayers aren’t writing the checks.

So when the government announces a crackdown on a handful of debt collectors—and even puts into place a so-called student-aid bill of rights, as the Obama administration just announced—it’s hard not to view these pronouncements for what they are: acknowledgements of the obvious and missed opportunities to address the fundamental policy and administrative lapses that brought us to this point.

This is especially important as the ED approaches the point when it will need to once again turn to the private sector for help with the nearly $1 trillion worth of Federal Direct Loans that currently reside on its books. Unfortunately, there’s no good reason to believe the department will do any better job managing this next financial-markets windfall when it comes to pass.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More on Student Loans:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team