By Raul Ilargi Meijer on 26 March 2012 for the Automatic Earth -
Image above: The student debt monster roars. From (http://studentbill.com/profiles/blogs/the-debt-monster)
On the heels of the assessment we saw from Tyler Durden, via Fitch, of the implosion of US student loan debt, which stands at over $1 trillion, increases by $40-50 billion (!!) each month (or $500-$600 billion per year), and of which 27% is already 30 days or more delinquent, John Hechinger explains for Bloomberg how the US Education Department goes about collecting this debt.
Turns out, it's a case of "Eat your heart out, Tony Soprano". Hard to believe this could happen in a supposedly civilized country, but there you have it. Here are some excerpts from Hechinger's article:
The debt collector on the other end of the phone gave Oswaldo Campos an ultimatum:
Pay $219 a month toward his more than $20,000 in defaulted student loans, or Pioneer Credit Recovery, a contractor with the U.S. Education Department, would confiscate his pay. Campos, disabled from liver disease, makes about $20,000 a year.
"We’re not playing here," Campos recalled the collector telling him in December. "You’re dealing with the federal government. You have no other options."
Campos agreed to have the money deducted each month from his bank account, even though federal student-loan rules would let him pay less and become eligible for a plan -- approved by Congress and touted by President Barack Obama -- requiring him to lay out about $50 a month. To satisfy Pioneer, Campos borrowed from friends, cut meat from his diet and stopped buying gas to drive his 82-year-old mother to doctor’s visits for her Parkinson’s Disease.
With $67 billion of student loans in default, the Education Department is turning to an army of private debt-collection companies to put the squeeze on borrowers. Working on commissions that totaled about $1 billion last year, these government contractors face growing complaints that they are violating federal laws by insisting on stiff payments, even when borrowers’ incomes make them eligible for leniency.
Education Department contracts -- featuring commissions of as much as 20 percent of recoveries -- encourage collectors to insist on high payments. Former debt collectors said they worked in a "boiler-room" environment, where they could earn bonuses of thousands of dollars a month, restaurant gift cards and even trips to foreign resorts if they collected enough from borrowers. [..]
Debt collectors are the subject of more complaints to the Federal Trade Commission than any other industry -- almost 181,000 last year. Within the past 17 months, three companies working for the Education Department -- including one that is majority owned by JPMorgan Chase & Co.’s private-equity arm -- settled federal or state allegations of abusive debt collections. The companies didn’t acknowledge wrongdoing, and Chase declined to comment. The Education Department said the government investigations didn’t involve the companies’ work for the agency. [..]
Debt-collection companies helped the Education Department recover $11.3 billion in defaulted loans during the year ended Sept. 30. The agency projects it will collect 85 cents on every dollar that defaults, factoring in collection costs and the time-value of money.
The debt collectors made out well, too. Based on a review of government contracts and Education Department data, the private companies -- working directly for the government and through state agencies -- received commissions of about $1 billion in the year through September. [..]
"Student-loan debt collectors have power that would make a mobster envious," Harvard Law Professor Elizabeth Warren, who helped establish the Consumer Financial Protection Bureau and is now running for a U.S. Senate seat from Massachusetts, said in 2005.
Under Education Department contracts, collection companies "rehabilitate" a defaulted loan by getting a borrower to make nine payments in 10 months. If they succeed, they reap a jackpot: a commission equal to as much as 16 percent of the entire loan amount, or $3,200 on a $20,000 loan.
These companies receive that fee only if borrowers make a minimum payment of 0.75 percent to 1.25 percent of the loan each month, depending on its size. For example, a $20,000 loan would require payments of about $200 a month. If the payment falls below that figure, the collector receives an administrative fee of $150.
Debt collectors are under pressure to extract as much money as they can up front, or lose their jobs, said J.C. Cournan, who worked for Pioneer Credit Recovery from 2004 through 2007.
Collectors, then paid about minimum wage, could earn thousands of dollars a month in bonuses, based on the money that borrowers repaid, said Cournan, who took the upstate New York job out of high school. Pioneer set monthly goals for wage garnishments and loan rehabilitations, he said.
Using automatic dialers to track down borrowers, Cournan would figure out where they worked, then contact their employers. He would tell borrowers that he was going to seize part of their wages if they didn’t make the payments. Using a company loan calculator, Cournan would insist on the minimum payment, he said.
"When you’re making 8 bucks an hour, it’s all about the bonuses. You’re starving," said Cournan, 26, now an auto mechanic. [..]
The collection business is booming as defaults more than doubled since 2003, along with outstanding federal student loans, which totaled $848 billion as of Sept. 30, surpassing credit-card debt.
The U.S. loan program was born in 1965 as a "Great Society" initiative for lower-income students under President Lyndon Johnson. Today, with tuition soaring, two-thirds of college seniors graduate with loans, which average $25,000, according to the Institute for College Access & Success, an Oakland, California, nonprofit education and advocacy group.
Obama -- supported by Congress -- has pledged to give borrowers a break and make college more affordable.
In 2009, Congress expanded a program that lets lower-income students tie payments to their incomes. It’s a sliding scale, based on their debt, salaries and family obligations. Married borrowers with two children, $30,000 in income and $30,000 in student loans wouldn’t have to make any payments, according to a government loan calculator. If circumstances don’t improve, the loans can be canceled after 25 years.
It's insanity to use this sort of thing against one's own young generation, upon which the future of a nation depends. The fact that the $1 trillion total student loan debt is set to double at the current rate within 2 years, is a clear enough signal of how the US sees its own children. The Vinnie the Kneecapper fashion of collecting on the debt really only serves to clarify and amplify that picture.
And you may rest assured that it's not just the young. As debt levels are rising, and defaults are exploding against the backdrop of much stricter bankruptcy laws, we will soon all know someone in our families or circle of friends who's had a visit of Vinnie.
Maybe now people will start to understand why we have said so many times before that they need to get out of debt.