Why Are We Paying $38 to Collect $1 of Student Loan Debt?

Ever been told to stop “throwing good money after bad”?

It’d be great if someone could offer that advice to the Federal Government (and get them to listen!), because that’s exactly what they’re doing by funding private debt collection agencies to chase down defaulted Federal student loan borrowers.

Recently exposed in a great article by Bloomberg, I’ve just learned that we’re currently paying private debt collection agencies $38 for every $1 they recoup in student loan repayments, and I’m outraged at the implications of this needless overspending.

It shouldn’t take a college degree to realize that this is not a good return on investment, and one that needs to be stopped ASAP, especially because it directly threatens funding for other important Government programs, like Federal Student Loan Relief Benefits.

Perhaps President Trump’s student loan debt plans will finally address this wrong, but personally, I’m not holding out hope for him to get anything related to student loans right, especially after he and Betsy DeVos have so clearly signaled their hostility toward resolving the student loan debt crisis in any meaningful, positive way.

How Could We Possibly Be Overspending This Badly?

Politics, as usual, but I’ll get to that in a moment.

Before I go Conspiracy Theorist on you, I’ll stick to the obvious, proven facts.

This part, I know to be true: the Department of Education has outsourced some of it’s collection activities for unpaid student loan debt to private debt collectors, who then bill the Federal Government for their efforts to reclaim debt that’s gone unpaid.

How it works is that only loans which have been placed in default get sent to the private collectors, who, the Federal Government assumes, will be better able to get the loans “rehabilitated”, meaning, moved out of default, and back into active repayment status.

For this service, the Federal Government pays the private debt collection agency, and they pay them quite handsomely.

In fact, each and every time a private debt collector rehabilitates a Federal student loan, they’re paid $1,710 for getting that borrower back on the farm and on a repayment plan.

And while that $1,710 number may not sound like much since debt collection agencies have to spend hours hounding people to get these borrowers to even consider fixing their defaulted student loans, the reality is that this is way too much to be spending based simply on how much money a rehabilitated Federal student loan typically pays back to the Federal Government.

In the most basic terms, the Federal Government is paying the private debt collectors more to get loans rehabilitatated than they’re receiving from those rehabilitated loans, setting up an unsustainable system where tax dollars are being wasted on a service that none of us really needs.

So What is the ROI on Our Investment?

Federal student loans enter default status after borrowers have missed 9 months of payments.

As part of the Federal rehabilitation program, these same borrowers are offered the opportunity to lift their loans back out of default status and have them placed again into repayment should they agree to resume making payments, and keep those payments up for at least 9 months.

The problem comes in because many of these borrowers (the estimate is about 80% of them) opt to make only the minimum monthly payment (which is just $5 per month).

Obviously, if the Federal Government is paying a private debt collector $1,710 and only receiving $5 per month in repayment from the borrower, then it’s going to take a while to get the money back; 28.5 years to be exact.

And since we know that about 80% of the borrowers who rehabilitate their loans choose to pay just that $5 minimum monthly payment when they’re moved back into repayment status, that means we’re shelling out way more money to these private debt collectors than we’re getting in return.

And that, dear reader, is one of the biggest problems with the student loan debt crisis. We’re throwing good money after bad, as I mentioned at the top of this article.

Who Cares?

You might not think it’s a big deal for the Federal Government to overspend, because… it’s not your money… but that’s where you’re entirely wrong, because it IS, in fact, your money that they’re wasting!

And not only is it your money that they’re spending so wastefully, but they’re also trying to actively cut spending in other important areas (like Federal Student Loan Forgiveness benefits), partially because they’re overspending so much in stupid areas like paying private debt collectors 40 times more than they should be!

And this is an especially salient point now that President Trump and Betsy DeVos have made moves to cancel the Public Service Loan Forgiveness Program, which perhaps could be saved if we simply stopped wasting so much money on private debt collectors!

Oh, but what’s that?

One of Betsy DeVos’s family businesses IS a private student loan debt collection agency? One of the very same agencies who are overcharging the American taxpayer?

Maybe we shouldn’t expect this issue to be resolved any time soon after all.

And maybe that’s why Betsy DeVos is trying to destroy the Federal student loan collections process by proposing moving all the work from her Department of Education to the Department of the Treasury… who has no historical experience managing this process.

Who do you think would be able to cash in should the entire system come crashing down?

The very same Betsy DeVos who’s family runs that private student loans debt collection agency that’s overcharging the Federal Government in the first place…


Tim's experience struggling with crushing student loan debt led him to create the website Forget Student Loan Debt in 2011, where he offers advice, tips and tricks for paying off student loans as quickly and affordably as possible.

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