The Devastating Impact Of Student Loans And Debt Collection

When it comes to discussing student loan debt collection

, a good place to start is to talk about money - specifically, the financial incentives that the U.S. Department of Education provides to third-party debt collection agencies. Because of the Department of Education's compensation structure, debt collectors are financially reward for collecting the original minimum payment, and are only paid a flat fee for modifying student loans or moving borrowers into restructuring or relief programs. As a result, student loan borrowers are often squeezed into making a minimum payment that is beyond their means, rather than given the opportunity to enter into a repayment program where the payments are aligned with their ability to pay.

Those financial incentives have an enormous impact on those with student loan debt. And the numbers of borrowers with student loan debt are skyrocketing. Reporters from the New York Times recently came up with some interesting facts and figures. For example, the percentage of borrowers who earn a bachelor's degree has soared from 45 percent in 1993 to 94 percent. In 2011, the average debt was $23,000. Total public student loans top out at $902 billion, with another $140 billion in private loans. A disproportionate number of borrowers are those who attend for-profit colleges. In fact, although only 11 percent of students attend for-profits, these students constitute 25 percent of federal loans.

Add into the mix the increasing cost of college and the plummeting funding provided by states for public higher education, and the result is akin to the housing bubble. Graduates are increasingly "underwater," owing more in monthly student loan payments than they can reasonably hope to repay.

For those who are facing the prospect of comparing costs and financial aid packages, the process is confusing at best and misleading at worst. Colleges and universities often present "financial aid packages" that include an assumption that the prospective student will take on tens of thousands of dollars of student loans. While it may appear as though the student is getting a free or low-cost education, he or she could take on enormous debt. This is particularly true if it takes the student more than four years to graduate - a phenomenon that's on the upswing as universities are slashing staff and class sections, meaning that students are unable to register for classes required for their majors.

The Consumer Financial Protection Bureau, created by the Dodd-Frank Act, is working toward developing a standardized form that institutions can use to inform prospective students of the costs and loan burden associated with their financial aid packages. The CFPB is soliciting input for such a form, and also has a beta version of a cost comparison worksheet where you can enter the names of schools and universities and obtain a side-by-side comparison of the "sticker price" of a school, the average amount of grants and scholarships, and the estimated student loan amount and debt after school.

But where does that leave borrowers who are behind in their federal student loan payments or who have defaulted on their student loans? All too often, they are at the mercy of third-party student loan debt collectors who have contracted with the Department of Education. That's why it is important for those in default to understand their rights under the Fair Debt Collection Practices Act, and to actively learn about loan modification programs offered by the federal government. Borrowers should never agree to minimum payments that are beyond their ability to pay, and instead should try and get the payments reduced to a level that's affordable.

by: Sergei Lemberg

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