The effort to help students manage their student loan debt has an interesting new angle: the federal government is paying $38 to collect just $1 of money owed.
According to Bloomberg, the Consumer Financial Protection Bureau estimates nearly half of borrowers who default and go on to work with debt collectors end up in default again within three years. In return for helping borrowers back to good standing, debt collectors receive up to a $1,710 payment from the Department of Education – regardless how long that good standing lasts.
Federal records indicate the government shells out to collectors almost 40 times what they actually bring in, which makes contracts with the federal government highly sought after.
“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,” Seth Frotman, CFPB’s top student loan official, told Bloomberg.
Further decreasing returns, most borrowers who get back on track end up making minimum payments, meaning the collectors are being paid that $1,710 to collect only about $45.
Adam Minsky, a lawyer representing student debtors in Boston, told Bloomberg, “I don’t see how anyone wins from this system other than the collection industry.”
All eyes are on Education Secretary Betsy DeVos to see if and how the system will change. DeVos has vowed to “do a better job” than her predecessors when it comes to managing the department’s student loan contractors.