Government Pays $1B A Year On Student Loan Debt Collectors

Over the last few years, the federal government has spent $1 billion a year to pay debt collectors to help struggling borrowers out of their student loan debt and find money to make regular monthly payments. Based on new government data, however, the efforts may have been a waste of cash.

According to a report in Bloomberg News, close to half of student loan borrowers that had defaulted on their loans and worked with debt collectors defaulted again within three years. The data came from the Consumer Financial Protection Bureau, which also found that debt collectors get up to $1,710 in payments from the Department of Education in the U.S. each time a borrower makes good on a debt after working with a debt collector through a process Bloomberg said is known as rehabilitation. If the borrower defaults again, the debt collectors still keep the money the government paid out.

The Education Department has set aside more than $4.2 billion for debt collector payments since the beginning of fiscal 2013, noted the report. The Department of Education’s new head, Betsy DeVos, has vowed to do a better job with the loan contractors than former President Obama did and suggested in comments last week that the fed should “start afresh,” reported Bloomberg.

Meanwhile, the CFPB told Bloomberg that the government should reexamine whether the program and the contractors awarded to private debt collectors is working to help the millions of Americans suffering with crippling student loan debt that stands at $1.4 trillion.

“When student loan companies know that nearly half of their highest-risk customers will quickly fail, it’s time to fix the broken system that makes this possible,” said Seth Frotman, the consumer bureau’s top student loan official in the report. Bloomberg noted the federal government typically pays debt collectors close to 40 times what they bring in for the government.


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