Student loan defaults shoot on first quarter 2012

Equifax, a credit-rating company, reported that $3.5 billion of government and private student loans went down the drain for the first three months in 2013, which is the most number of bad debts since the firm began keeping track.

Collection in Limbo

However, the Department of Education’s Office of Inspector General discovered that the $1.1 billion in defaulted student loans as of December last year was due to a collection problem.

Patrick Howard, Assistant Inspector General for Audit, held a system installed in 2011 by multinational document management corporation Xerox responsible. The program was expected to move loan accounts from servicing firms to privately owned collection organizations. But in his report last December 13, Howard said the Department didn’t pursue remedies that made borrowers unable to remove their loans from default statuses.
When sought for comment, a spokesperson of Xerox declined to issue statements relating to the questions thrown by the Department of Education.

Credit analysts, on their part, believed the damage was irreparable. They said the collection problem caused weakness in the department’s financial controls for the past year.

The analysts also believe that the problem in proper debt collection is a sign of a possible bigger dilemma.

Hounding Borrowers

Take for example Jason Paskowitz, 46, who still has to pay $39,000 on loans he borrowed to finance his studies in New York in the 1980’s. He said he only borrowed $20,000 but this surged when interest and fees came in after he dropped out of law school. During the interview, Paskowitz revealed that collection agents, who didn’t give him options easily available to him, had been pursuing him until now.

Recently, the Department of Education made efforts to address similar concerns by lowering the commission loan companies give to collecting firms.

Defaulted loans would then be converted into “rehabilitation loans”, which means that all outstanding fees and balances would become new loans. The change would let borrowers pay collection companies 11% of the outstanding balance, compared to the 15% in earlier years.

Chris Greene, spokesperson of the Department of Education, said they are monitoring the activities of the collection companies and would always be advocating the borrowers’ interests.