Student loan collection issues have been in the news lately with a number of proposals floating around Congress to allow for less burdensome discharge of student loans in bankruptcy and even a bill to forgive student loan debt outside of bankruptcy under certain circumstances.
This week I wrote a guest editorial for the Atlanta Journal Constitution proposing a return to the pre-1998 Bankruptcy Code provision that allows for student loan discharge 7 years after the loan first comes due.
At this point, however, student loan debt remains non-dischargeable and, as such, private bill collectors working on behalf of lenders who have issued non-dischargeable student loans, are aggressively pursuing delinquent borrowers – both former students as well as parents who co-signed or guaranteed their child’s student loans.
What rights are available to student loan borrowers? I asked attorney Sergei Lemberg, whose firm represents consumers in matters related to fair debt collection, fair credit reporting and lemon law to answer this question. Here are Sergei’s observations:
If you’re behind in repaying your student loans, you’re in good company. It’s estimated that five million former students are in default, and it’s a safe bet that debt collection agencies are nipping at their heels. That’s because the U.S. Department of Education outsources federal student loan debt collection to private debt collection agencies. In fact, collecting on defaulted student loans is big business; debt collection agencies rake in about $1 billion per year in commissions. However, a debt collection agency only makes its commission if it convinces you to make a monthly minimum payment that equals a certain percentage of the amount you owe. If a debt collector agrees to a monthly payment below that threshold, the agency simply receives a flat administration fee for the account.
The Education Department recently announced that it would review its debt collection agency commission structure, and that it would mandate that debt collectors offer those in default an income-based formula for collecting minimum payments on student loans. However, these changes will likely not take effect until mid-2013. In the meantime, it pays to understand the rules of the road so that you can meet your obligations while not becoming a victim of debt collection tactics.
First, understand that you may be eligible for student loan consolidation if you have either a direct loan or a Federal Family Education Loan. In addition, you may qualify for the Education Department’s Special Direct Consolidation Loans, which are being offered until June 30, 2012. To be eligible for these loans, you mush have at least two FFEL loans, one from the Education Department and one from a commercial lender. The Education Department loan must be less than 270 days delinquent. Consult the Department of Education’s loan consolidation center for additional information.
Second, be aware that private debt collection agencies that collect on behalf of the Department of Education must abide by the Fair Debt Collection Practices Act. This is a federal law that draws boundaries between debt collection tactics that are allowed and those that cross the line. For example, the FDCPA prohibits debt collectors from calling you early in the morning or late at night, calling repeatedly to the point of harassment, and threatening actions that they do not intend to take or are not allowed to take. In collecting student loans, debt collectors have been known to threaten consumers with wage garnishment unless a payment is made immediately. While it’s true that wages can be garnished in order to repay defaulted federal student loans, the debt collection agency must send you a notice of intent to garnish and let you know that you have the right to an impartial administrative hearing.
Finally, know that according to the FDCPA, if a debt collector crosses the line, you have the right to sue the debt collection agency. If you win your lawsuit, the debt collection agency will be required to pay you monetary damages, as well as your court costs and attorney fees. If your rights have been violated, consult with a fair debt attorney.