Financial advisors working with student loan borrowers will eventually encounter a borrower facing default and collections. When a borrower is in default, government has extraordinary power to collect on debts including the authority to seize tax refunds, garnish wages without a court order, take Social Security benefits, and charge high collection costs to borrowers.
Be aware of debt collection practices
Loan holders employ shady collection agencies to pressure borrowers to pay. These agencies charge high collection fees and don’t always play by the rules. Although the government doesn’t typically have to sue borrowers in court to collect, they do sometimes use litigation, and there is no statute of limitations for collecting on federal student loans.
Be especially cautious in these cases, because they are trickier than most. Always consider whether borrowers can benefit from loan discharge or cancelation and remember--default status significantly restricts a borrower’s options so advisors should be prepared to direct borrowers to reliable information about curing default by consolidation or rehabilitation.
The federal government hires private collection agencies to collect defaulted student loans. Private lenders hire these same third-party collection companies. Unfortunately, debt collectors have demonstrated an alarming penchant for abusive and deceptive practices and can get quite nasty.
Government oversight of collection agencies is weak, and often these companies are not held to account. State and federal fair debt collection laws try to rein in their worst behaviors, but more is needed.
Borrowers need help fighting back, so that debt collectors do not unlawfully harass them.
Advisor Alert - Common Problems with Collection Agencies
Advisors should be aware of the widespread problems we see with collection agencies so that they can help borrowers assert their rights.
Common problems with student loan collection agencies include:
- aggressive and abusive collection tactics
- failure to accurately inform borrowers of their rights
- a tendency to steer borrowers towards options that make money for the collectors
- failure to inform borrowers of affordable repayment options
- failure to inform borrowers of their rights to loan cancellation
- misrepresenting itself as the government rather than a private contractor
- failure to recognize or communicate defenses to wage garnishments and tax refund intercepts
- collection attorneys may fail to adequately review the cases they bring, creating a risk that lawsuits may be filed against the wrong person or for the wrong amount
Proposed Rules Governing Debt Collectors
The Consumer Financial Protection Bureau (CFPB) has proposed new rules for governing third-party debt collectors. Meh. The proposal isn’t all bad for consumers, but it could be stronger. Advocates for student loan borrowers, including the great team at the National Consumer Law Center (NCLC) have published detailed information about the proposed rules and are working to improve the rules before they are finalized.
In summary, the problems with the CFPB proposal include:
- It allows collectors to make up to seven attempted calls per debt per week, either to the debtor or to his or her friends and family. If a borrower had 7 student loans in collection, collectors could phone 49 times a week!
- It allows texts, emails, and direct messages without consent. Some borrowers can’t or won’t be comfortable accessing important information if they must first click a potentially unsafe link
- It provides a “safe harbor” for collection attorneys, even though some engage in false, deceptive, or misleading practices. What? How does that make sense?
- It fails to protect consumers against abusive collection of time-barred debt, known as zombie debt. Run! Zombie debt collectors want to eat our brains!
- It allows collectors to trick consumers into re-starting the statute of limitations when it should instead ban collection of time-barred debt
- It allows potentially confusing and ineffective disclosures and does not require information be provided in writing
- It permits violations of consumer privacy
What’s pretty good about the CFPB’s proposed rule?
- It allows consumers to stop phone calls from collectors without stopping all communications.
- It prohibits collectors from reporting debts to credit bureaus without first notifying the consumer that they are attempting to collect a debt.
- It prohibits the sale of certain debts such as debts that were paid, discharged in bankruptcy, or where an identity theft report was filed.
- It prohibits communications on public social media platforms.
What Advisors Can Do Now to Protect Consumers Facing Collections
Federal law requires third-party collection agencies to stop calling a borrower after they receive a written request to stop. If you’re working with a borrower in collection, consider helping clients in preparing a “cease communication” letter. You can also refer borrowers to the National Consumer Law Center’s Self-Help packet including a sample cease communication letter.
For problems with one of the contracted collection agencies employed by the Department of Education, encourage your clients to file formal complaints.
Each of the collection agencies that works with the Department of Education should have a “Special Assistance Unit” for customer concerns. Let your clients know the following:
- Clients struggling with collection calls may mail a “cease communications” letter (that should be done by certified mail, return receipt requested, and with copies of all correspondence kept).
- The Service Members Relief Act covers collection lawsuits against active duty service members and allows service members to ask for more time to respond to court filings. Advocates may be able to assert these special protections to buy more time during other types of collections proceedings where service members are on active duty or have just completed active duty.
- Make complaints by calling the Department of Education’s Default Resolution Group call center at 1-800-621-3115.
- Clients should ask the Default Resolution Group for the contact information of the Special Assistance Unit within the collection agency.
- After contacting the Special Assistance Unit, if the situation is not resolved, a borrower may file a written complaint by sending a letter, including any evidence of wrongdoing on the part of the collection agency, to:
Chief of Contract Analysis and Compliance
US Department of Education
61 Forsyth Street, SW 19T89
Atlanta, GA 30303
- Borrowers may file an online complaint about collection agencies using the Federal Student Aid (FSA) Feedback system.
- Borrowers may file consumer complaints with state and local consumer protection agencies.