Did you know that student loan bill collectors are often paid over 100,000 a year to put you into loans and rehabilitation programs that are not reasonable or affordable? Just like the mortgage industry servicers that violate the law and regulations, student loan collectors are paid by charging fees, and putting students into rehabilitation plans and loans that collect the highest fees.

But the Department of Education issued new regulations effecting student loan rehabilitation effective July 1, 2014 applicable to FFEL and Direct Loans which will help. As of July 2014, loan holders will be required to initially calculate the reasonable and affordable payment amount using the income-based repayment (IBR) formula. This does not put borrowers into Income based repayment loans it only uses the IBR formula to calculate the rehabilitation payment. Normally a borrower can have the loan declared current as if it was never in default by completing 9 of 10 payments in a rehabilitation program. Borrowers can only enter into an IBR (income based repayment loan/plan) after they get out of default.

The new formula for rehabilitation will be the current IBR formula based on payments no higher than 15% of discretionary income even though some borrowers may now have IBR plans based on a 10% threshold. The formula can cause a 0 payment, but regulations state the borrower must pay at least $5/month. The borrower can object the amount calculated by the lender in which case, the loan holder must recalculate the payment based solely on information on an approved form.

Reasonable and Affordable

Current regulations require collectors to offer reasonable and affordable payment plans. Yet collectors routinely violate the law and tell borrowers they must make payments beyond what they can afford because they make commissions on the payments.

The Department admits their collection agencies first try to get defaulted borrowers to pay the total defaulted debt and then attempt to negotiate payments as close to the ten year standard payment amount as the borrower can pay.

This problem is compensation is paid to collectors for setting up rehabilitation plans only if the plans require borrowers to make higher minimum payments. The 2009-Student Loan Collection Procedures manual for the agency requires payments must be reasonable and affordable based on the amount owed and on the borrower’s total financial circumstances. The “amount owed” criteria is not in the current regulations so affordability is the only standard. The new rules change the commission system. We do not know all of the details because the Department now refuses to release the collection agency manual to show what is and what is not allowed collection procedures. However, the Department appears to be paying full commissions if the borrower’s rehabilitation payment is based upon the income-based repayment (IBR) formula or upon a percentage of the loan balance.

The borrowers have always been entitled to pay only a reasonable and affordable amount. There should be no dramatic shift based on what the law says. The drama occurs because collectors are now more likely to tell borrowers the truth because they don’t have to sacrifice their own profits to do so.

It’s a good outcome if collectors are paid to follow the law, but there are still other ways in which the current commission system rewards collectors for steering borrowers into programs that may not be in their best interests. Besides the positive steps in these final rules, the Department should make its contracting and commission system transparent and ensure collectors are complying with all laws and regulations. Borrowers can’t get truthful and unbiased information.  Instead they are given whatever information that will profit the collectors the most. The goals of getting students out of default and into an affordable loan seems impossible as long as the government compensates private collection agencies for collecting as much as possible, but pays them zero to “safeguard” the borrower rights.

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