No Need to Wait for Student Loan Bubble Bailout: Taxpayer Funds Six Figure Salaries of Student Debt Collectors
The spiraling vortex of student debt in the United States is sure to remain a controversial and intrigue-filled topic of national concern in the decades to come. The country has heard for more than thirty years that the social security net would become insolvent in the near future and that it would be up to generation next to fill the void. But, rarely does one hear two-and-two put together: as the baby boomers retire and need to be cared after, their generation next progeny will be six feet under in debt, especially of the student loan variety.
These debts are not only expensive for the borrower, but also the the United States taxpayer who presumably will be forced one day soon into footing the bill for the $1trillion in student debt in the form of a bailout. But, until that day, the taxpayer will be stuck footing the bill for the debts in another way: debt collection. Enter debt collector Joshua Mandelman. According to Bloomberg, Mandelman took in $454,000 in just one year working to collect student loan debt for the U.S. government.
Mandelman worked for ECMC, a company with which many indebted students are familiar. The company owes its successes to an 18-year-old agreement with the U.S. government, whereby the company charges fees to borrowers and earns commission from taxpayers – totaling as much as 31 percent – when it collects on defaulted student loans. The arrangement has been approved by Congress.
According to Robert Shireman, a former deputy undersecretary of education under President Barack Obama, the loan program “is enriching collection agencies and undermining a goal we all want for society – to encourage people to go to college.”
ECMC is just one of 32 “guaranty agencies” that play a central role in the world of higher-education finance. They are responsible for student loans for the U.S. Education Department, which first began lending in 1965. The groups guarantee the loans made by banks and other private lenders. They promise to repay the lenders in the event that borrowers do not. If the agencies are unable to recover money lent, the federal government then takes on the loan; i.e. the U.S. taxpayer.
Since it was founded in 1994, the company has reunited the U.S. Treasury with $4.3 billion, according to Dave Hawn, ECMC’s chief operating officer.
“I’m really proud of what we do as an organization,” Hawn said.
The debt collectors at ECMC receive bonuses as a reward for extracting money from their victims, defaulted borrowers. In 2010, the bonuses for top performers reached as much as 10 times their base salaries, which ranged from $33,000 to $46,000, according to the company’s tax return.
As is no secret, U.S. higher education debt has multiplied, more than doubling since 2003 to $67 billion. Congress is currently debating whether or not to double interest rates on some student loans beginning in July. Outstanding student loans has ballooned to bubbly proportions at $1 trillion, surpassing credit-card debt.
The Education Department declined to discuss compensation at ECMC, referring questions to the company.
The agencies get 1 percent of a borrower’s loan amount when they prevent a default. According to the Education Department, the average debt per former student is $25,000 (other figures have it as high as $60,000), which means a commission of $250. However, their commission multiplies once a borrower defaults or fails to make a payment for 270 days or more.
Under government regulation, guaranty agencies reserve the right to add collections costs as much as 25 percent above and beyond the loan balance. They also keep 16 percent of any money recovered.
By law, the agency can receive as much as 37 percent of a borrower’s entire loan amount. ECMC says it usually collects 31 percent or $7,750 on a $25,000 loan.
In 2010, ECMC generated $131 million from collections – that’s around three quarters of its revenue compared with about $17 million from programs targeting the prevention of default. The company is keeping its bottom line low, as it has just about 90 debt collectors for 557,000 borrowers.
These debt collection agencies have their work cut out for them, according to a recent New York Times article. Apparently there is a lot of student debt because the article was more than 4,500 words long. The gist of the article was that students are taking on more debt to get themselves through college, and finding it harder to pay back what is owed. According to NYT:
- 94 percent of students who receive a bachelor’s degree borrow to pay for higher education. In 1993, this number was 45 percent.
- The average debt in 2011 for student loan borrowers was $23,300, with 10 percent of those individuals owing more than $54,000 and 3 percent more than $100,000.
- The total amount of federal student loans has increased by over 60 percent over the past five years.
- Nearly one in ten student loan borrowers who began repaying in 2009 defaulted within two years.
- According to data received from the College Board, state and local financing per student fell by 24 percent nationally between 2001 and 2011.
- Tuition and fees at four-year state colleges jumped nearly 75% between 2001 and 2011. For nonprofit private institutions they were up 29 percent.
- According to data from the College Board, state and local financing per student declined by 24 percent nationally between 2001 and 2011.
The structure for student debt in the United States (and sought after for Europe in the form of Bologna agreements) cannot go on forever. It is a system riddled with contradictions and driven by greed. There is absolutely no due diligence on the part of the banks when vetting the potential loans. The loans are for profit, paid or unpaid. In the end, U.S. taxpayers will have this one put on their tab. So it goes – again.