With $67 billion of student loans in default, the Education Department is turning to an army of private debt-collection companies to put the squeeze on borrowers. Working on commissions that totaled about $1 billion last year, these government contractors face growing complaints that they are violating federal laws by insisting on stiff payments, even when borrowers’ incomes make them eligible for leniency. Education Department contracts — featuring commissions of as much as 20 percent of recoveries — encourage collectors to insist on high payments. Former debt collectors said they worked in a “boiler-room” environment, where they could earn bonuses of thousands of dollars a month, restaurant gift cards and even trips to foreign resorts if they collected enough from borrowers. Debt collectors are the subject of more complaints to the Federal Trade Commission than any other industry — almost 181,000 last year. Within the past 17 months, three companies working for the Education Department — including one that is majority owned by JPMorgan Chase & Co. (JPM)’s private-equity arm — settled federal or state allegations of abusive debt collections. The companies didn’t acknowledge wrongdoing, and Chase declined to comment. The Education Department said the government investigations didn’t involve the companies’ work for the agency. The U.S. Consumer Financial Protection Bureau, created in 2010 in the wake of the credit crisis, has proposed supervising the largest debt collectors to ensure they are complying with laws such as the Fair Debt Collection Practices Act. About 5 million federal education-loan borrowers are in default, generally meaning they have failed to make payments for 270 days or more. “With student-loan defaults rising, we want to make sure borrowers clearly understand their loan-repayment options and debt collectors are following the law,” Rohit Chopra, the agency’s student-loan ombudsman, said in an e-mail. Debt-collection companies helped the Education Department recover $11.3 billion in defaulted loans during the year ended Sept. 30. The agency projects it will collect 85 cents on every dollar that defaults, factoring in collection costs and the time-value of money. The debt collectors made out well, too. Based on a review of government contracts and Education Department data, the private companies — working directly for the government and through state agencies — received commissions of about $1 billion in the year through September.
Bloomberg has the full article