On a quiet Friday afternoon, just prior to the Fourth of July weekend, the U.S. Treasury Department released the first report on its student loan debt collection pilot program. Treasury launched this pilot program last year with the U.S. Department of Education (ED) to learn more about the way the government collects on defaulted student loans. To do this, ED referred a small sample of loans from its outstanding defaulted loan portfolio to Treasury for collection.
On first blush, the data doesn’t look good for the pilot. Treasury rehabilitated fewer loans out of default status (8 v. 126) than the control group whose loans were placed with a traditional private collection agency. The private collectors also collected more money — mostly through wage garnishments which can leave the borrower with as little as $217.50 per week. But rehabilitation is not necessarily a long term solution and can actually hurt some borrowers. The amount of money collected in the short run also doesn’t tell the whole story. Overall, Treasury resolved only slightly fewer loans and appears to have done more to help borrowers consolidate their loans out of default status or access loan cancellation programs to which students may be entitled. It is also worth noting that Treasury began its program slowly and may have been hampered by the lack of consistent Department of Education branding. In order to determine whether the Treasury pilot program was a success, we need more information.
Federal student loans are complicated and borrowers in default have many different options. Student loans have no statute of limitations – they can even be taken out of Social Security payments – and there can be serious long term consequences if a borrower makes the wrong choice. The goal of working with student loan borrowers in default should be to inform and counsel borrowers about the full range of available options, and to facilitate getting the borrower into the right program for the long term based upon that borrower’s circumstances, not just to collect the most money in the short run or shoehorn everyone into the same program.
Treasury took a different approach from the control debt collection agency, it only called the borrower once per week and it did not impose wage garnishments until 11 months into the pilot. This has led some to claim that “if we are interested in rehabilitating borrowers, the answer is not to be more gentle.” But should the goal of the pilot be to “rehabilitate” all borrowers? You can browbeat people into doing just about anything. But that doesn’t mean that it is the best result for borrowers – or even for the government, if borrowers later redefault.
While loan rehabilitation is an important option, it is not right for every borrower. In fact, in our experience working with clients, very few choose loan rehabilitation as a method for getting out of default. Treasury’s report acknowledged this fact, stating:
It is critical… that borrowers who pursue rehabilitation understand that it can only be successfully completed once and, as such, may not be the most suitable option for borrowers who may not be able to continue to meet their monthly payment obligations once they return to current status.[1]
As NCLC wrote in our 2014 report, Pounding Student Loan Borrowers, ED’s compensation system rewards debt collectors for maximizing the dollars collected and for loan rehabilitations. In fact, when ED fired five of its debt collectors last year for lying to student loan borrowers, it was precisely because those debt collectors’ exaggerated claims about the benefits of loan rehabilitation. Therefore, it should not be surprising that the Treasury pilot resulted in fewer loan rehabilitations.
Overall, Treasury resolved the loans of 237 borrowers (or 4.14 percent of borrowers). This is less than the control group placed with a traditional debt collector resolved (313 borrowers or 5.46 percent); however, the difference is not nearly as dramatic as it is for rehabilitations or dollars collected. Therefore, more of these borrowers resolved their loans in some other way.
Treasury notes that there are three ways to resolve student loan default: “(i) an installment payment agreement of up to 240 months, (ii) consolidation (if loan(s) have not previously been consolidated) and (iii) a loan rehabilitation (if loan(s) have not previously been rehabilitated).”[2] (There are actually more than three ways to resolve student loan default, such as through one of the statutory loan cancellation programs, e.g., disability discharges.)
The Treasury report indicated that 73 borrowers in the pilot consolidated their loans out of default status and 17 borrowers received “administrative resolutions” – which includes loan cancellations, but the report does not provide data about the number of loans either consolidated or canceled by the control group. Presumably, the pilot numbers must be proportionally higher than the control group in order to make the math work. (The other remaining borrowers’ loans were resolved through involuntary collection methods such as tax refund offsets. If the pilot and control groups are truly comparable, that number should be roughly the same for each group.) Finally (and most importantly), we do not have any data about what program is best in the long term for the borrowers who were served throughout this pilot program.
It is yet to be seen what we will learn from the Treasury pilot. However, any assessment needs to be based on more than just the number of loans rehabilitated and the dollar amount collected.
[1] U.S. Dep’t of Treasury, Report on Initial Observations from the Fiscal-Federal Student Aid Pilot for Servicing Defaulted Student Loan Debt 6 (July 1, 2016).
[2] Id. at 2.
