Student loan collectors threaten debtors with wage garnishment

The recession has been hard on many in Georgia — workers whose jobs simply disappeared, people whose property values have plummeted, families who have had to walk away from their homes and communities. It has also been hard on college graduates, many of whom had to borrow significant sums of money to pay for the ever-increasing cost of higher education — only to enter one of the worst job markets this country has ever seen.

With an estimated 5 million borrowers and $67 billion worth of student loans currently in default, the U.S. government is increasingly relying on private debt collectors to get debtors to pay up. Unfortunately, incentives included in Education Department contracts have encouraged a number of companies to use threats of wage garnishment to demand “minimum payments” that are higher than what borrowers could qualify for based on their income.

These two practices — refusing to offer debtors reasonable and affordable repayment terms, and misleading debtors about “minimum” payment requirements — violate the Fair Debt Collection Practices Act and federal-aid laws. Yet student loan collectors continue to engage in them and risk being sued. Why? Simple, if they successfully “rehabilitate” a defaulted loan, they can earn a commission worth up to 16 % of the total loan amount.

Later this week, consumer advocates, industry representatives and government officials will meet with Education Department leaders to talk about changing the system so that collectors don’t have such a strong incentive to use threats of wage garnishment and deception against defaulted borrowers.

One such change being considered would require collectors to offer income-based payments to qualifying borrowers who have defaulted on their student loans. If new rules are approved by the federal agency, they could take effect as soon as July 2013.

Source: Bloomberg News, “U.S. Calls Debt Collectors on Student Loans,” John Hechinger, March 26, 2012