America’s student loan debt has risen from approximately $500 billion in 2007 to $1.44 trillion in the first quarter of 2017. The New York Fed’s Quarterly Report on Household Debt and Credit reveals that 11 percent of cumulative student loan debt is either ninety days delinquent or in default.
The Department of Education estimates that over 8 million student loan borrowers are in default. The CFPB reports that 90 percent of the borrowers who are in default on their federal student loans are not taking advantage of federal repayment programs that allow income-driven repayment (IDR).
Student Loans cannot be discharged by bankruptcy. Some say that the debt collection industry must be looking at the student-loan market as a big growth opportunity, but collecting on student loan debt is not that simple, especially with federal loans. The government has many options to collect on debt that private lenders do not.
Federal Perkins Loans
Colleges may award these loans to students with the highest financial need, using federal government money. The 5 percent fixed interest rate is low, and you don’t make any loan payments while in college. You can borrow a total of $27,500.
Federal Direct Subsidized Loans
These need-based loans have a low interest rate of 4.29 percent, and the government pays the interest charges while you’re in college. This interest rate is fixed, which means it will not change over time. You can borrow up to $3,500 your freshman year, and this limit increases to $4,500 for your sophomore year, and $5,500 each for your junior and your senior year.
Federal Direct Unsubsidized Loans
These non-need-based government loans also have a fixed interest rate of 4.29 percent. But they allow you to borrow more money than a Direct Subsidized Loan alone. You can pay the interest while you’re in college or add it to the amount of your loan. The second option means you’ll end up paying more money over time.
Federal Direct PLUS Loans
These non-need-based government loans allow parents (and graduate students) to borrow the total cost of attending college, minus any other aid received. They have a 6.84 percent fixed interest rate.
Private (Alternative) and State Loans
These loans from banks, colleges, private organizations and state government agencies usually are not need-based or subsidized. They may require good credit, which often means an adult with good credit must cosign the loan. Interest rates on these loans are often higher than on federal loans, and the rates may rise over time. These loans may also have terms that are not as favorable as those of federal loans. Sallie Mae is the nation’s largest private student loan lender. Other top lenders include PNC, College Ave, SunTrust, Citizens Bank and LendKey.
Collecting on Federal Student Loans
The government has the administrative power to collect federal student-loan debt without ever going to court. Every year, thousands of borrowers have their wages garnished up to 15 percent of their disposable income, their tax refunds seized, other government benefits diverted to unpaid student-loan debts, and as a last resort, suing for the loan balance.
But federal figures show that administrative methods account for just about a third of what the government recovers every year from borrowers. Since 2012, diverting borrowers’ tax returns and other methods resulted in a $24.8 million payment on defaulted student loan debt.
The remaining amount was collected from borrowers after the U.S. hired private debt-collection law firms, who over the past five years, filed suits to win judgments or payments to the federal government. In response to critics of the strategy of hiring private lawyers to target student loan debt, federal officials have said that debt collection has always been one of its priorities, and that hiring private counsel advances that goal within the letter of the law.
A recent action by a Court of Federal Claims has effectively stopped the collection of defaulted student loans. If borrowers have established a repayment program, the Department of Education uses contract collection agencies to oversee collection of these repayments.
The collection methods and tools available to private student loan lenders are very different from the methods and tools available to federal student loan lenders. It is important for borrowers to know which tools private lenders can and cannot use.
The CFPB is charged with overseeing private student loan activity. A private lender cannot start collection activity on a student loan unless it is in default. For federal student loans, “default” is defined by federal laws. For private student loans, “default” is defined in the loan contract. For example, so contracts state that upon the death of the co-signer, the loan is immediately in default and must be paid in full.
Unlike federal student loan lenders, private lenders must go to court to get a money judgment against you before using collection tools like garnishment. Private lenders usually attempt out-of-court collection before going to court. Most private lenders will hire a third-party debt collector to contact you and attempt to collect the debt. Lenders or debt collectors usually attempt to collect a defaulted student loan by sending collection letters and/or making phone calls.
If a private student loan lender wants to use additional collection tools such as garnishment, the lender must file a lawsuit in court and get a money judgment. The lender needs to prove to a judge that:
- the lender holds a promissory note for the loan amount
- the borrower signed the promissory note, and is in default on the note.
Once the student loan lender receives a money judgment against the borrower, it can use other types of collection methods. These methods, with some limitations which may differ from state to state, include:
- garnishing wages
- placing liens on personal property and real estate
- freezing and garnishing money in bank accounts.
Student Loan Debt Is Big News
Student loan debt is and will continue to be “big news.” If your collection agency or law firm is already collecting education debt, you understand its complex nature. If you are considering adding that collection specialty, check out the sources below as well as these additional NL Insider blogs on Student Loan Debt: