Inside The Playbook of the Collection Agencies

Remember the Brady Bunch episode where the rival quarterback becomes interested in Marcia so he can steal the Westdale High School's football team's playbook (her brother Greg was on the team)?  Where am I going with this...hmm?  It just popped into my head at some point during the many hours that I was immersing myself in the 2009 PCA Procedures guide ( Download 2009 PCA Procedures).  If you are not in the mood to go deep into the weeds on this one, you may want to stop here.  But if you have a defaulted student loan or are advising someone who does, you may find this information helpful in understanding your rights and the options available to you. 

A few explanations first.  PCA is an acronym for Private Collection Agencies.  These are the private contractors who collect on defaulted federal student loans for the Department of Education.  A presentation in 2008 indicated that the defaulted loan portfolio this group of collectors managed had 2.56 million accounts with $23.8 billion outstanding for an average balance of $9,300.  Remember that this is only about half the defaulted portfolio which exceeds $50 billion today, as the guarantor agencies try to collect on the other half. 

So, what did I glean from reading the 2009 PCA Procedures guide about defaulted student loans (note that defaulted loans being collected by guarantors may have somewhat different policies)?

• Department of Education employees not subject to FDCPA:  The Fair Debt Collection Practices Act (FDCPA) which "prohibit abusive, deceptive and unfair debt collection practices by debt collectors...by its terms does not apply to the collection actions of ED employees.  The FDCPA does, however, apply to the PCAs ED retains to perform collection services on student loans."

• Details collection costs:  "Currently collection cost on an account assigned to a PCA is 24.34%.  The percentage taken out of each regular payment is 19.58%.  Example:  a $100 payment will reflect a collection cost of $19.58."
  
  • Be sure that collection costs are only applied to the interest and principal as the guide had this warning in it:  "DMCS currently calculates projected collection costs incorrectly.  The system calculates collection costs on any existing fee balances in addition to principle and interest.  However, ED requires PCAs to calculate projected collection costs based only on outstanding principal and interest."

• Want to regain eligibility for Title IV student assistance after defaulting on a federal loan?:  "For the borrower with loans to regain eligibility the borrower must enter into an agreed upon payment arrangement and make six consecutive, full, voluntary payments on time.  On time is defined as within 15 days of the established due date.  This benefit is available one time only per borrower."

• Department no longer intends to pursues collections against co-makers (also known as endorsers or cosigners):  "In February 2008, ED made a business decision to suspend collection against most co-makers and to terminate each co-maker's relationship to the debt.  This termination project has not yet been implemented due to system related issues."

• Collection agency may suspend collection activity and may refer account to the Department of Education for any of these four reasons:
  • The borrower disputes the amount owed citing, for example, that the debt was never incurred, was paid off, or should have been canceled.
  • The borrower raises a legal defense against repayment (for example: closed school, ability to benefit, fraud, or circumstances under which ED may be prohibited from pursuing collection)
  • The borrower requests a written review or hearing in response to the 65-Day Notice of Federal Offset or 30-day Administrative Wage Garnishment Notice. The PCA will process all such correspondence in accordance with ED requirements and guidelines.
  • The borrower files a written or verbal complaint against the collection activities of the PCA.    
    • Includes written/verbal Congressionals, U.S. Attorney inquiries and media requests

• To get a collection agency to stop all activity, a defaulted borrower must provide that request in writing:  "Cease collection activity requires the PCA to stop all collection activity, letters, phone calls, and contact with the borrower or employer... Ceasing collection activity typically occurs when the borrower requests in writing that the PCA stop all communications with them.  In such cases the PCA is allowed one final contact.  Please note that a request to discontinue phone calls to the employer, or a request to discontinue phone calls to the home telephone number is not considered a request to cease collection activities."
  • But Department of Education asks collection agencies to pursue administrative wage garnishment or litigation for those accounts:  "ED expects the PCA to evaluate these accounts for AWG or litigation.  If AWG or Litigation is not possible, the PCA can request that ED recall the account."

• Reasons that loans can be discharged:
  • School closure
  • Ability to benefit:  "Borrower did not have a high school diploma or GED; and borrower was not properly tested or evaluated before acceptance; and there is corroborating evidence of ATB violations at the school at the time."
  • Disqualifying status criteria:  "Borrower had a disqualifying physical or mental status, age or criminal record at time of enrollment.  Status prevents, by law or regulation, employment in the field of study."
  • Unauthorized signature criteria
  • Unpaid tuition refund:  "Borrower did not complete course or loan period and did not receive a refund of unused tuition."

• Three types of compromises available to borrowers.  "Compromises are account settlements whereby ED (through the PCAs) accepts a reduced overall payment to satisfy the debt(s) in full.   Compromises are not to be offered as the first option in collection negotiations.  The PCA should only discuss compromise settlements after negotiation of the borrower’s ability to pay has progressed and under those circumstances allowed by ED."
  • Standard:  Borrower pays current principal and interest OR pays at least current principal and half the interest OR pays at least 90% of principal and interest
  • Discretionary:  any compromise where borrower has offered less than the standard compromise amount.  These require approval from ED.
  • Non-standard:  compromises that PCA offers to borrower that are not approved by ED and less than standard compromises. 
    
    • PCAs can offer 3-6 of these each quarter.  No commission earned on any beyond this.  

• Provides details on acceptable payments while rehabilitating a loan
  • Rehabilitation definition:  "Rehabilitation is an ED “payment” program whereby an eligible borrower can, through appropriate and timely monthly payments (9 of them), “rehabilitate” their defaulted loan(s) into good standing.  Through the borrower’s efforts of making consistent payments on-time, the borrower is able to receive certain benefits based upon a showing of good faith and a commitment to pay off their debt.  Benefits include – reduced collection costs, removal from credit bureau report and ability to take advantage of appropriate program benefits such as deferments."
  • Here are the minimum payment percentages for payments to be considered "reasonable and affordable" and for the PCAs to earn their full commission on the rehabilitated loans:     

               If the balance to be        The minimum payment
               rehabilitated  is:                   percentage is:

• <= $7500                                   1.29%
  >$7500 and <=$10,000                 1.14%
  >$10,000 and <=$20,000               1.00%
  >$20,000 and <=$40,000               0.87%
  >$40,000                                   0.76%

• Defaulted FFEL borrowers have an additional rehabilitation option referred to as Balance Sensitive Rehabiliation:  "Rehabilitations where the borrower’s approved payment amount and the acceptable minimum monthly payment amount (Section 3, subsection M of this Chapter) is less than 1.29% of the final payoff balance are considered “balance sensitive” rehabilitations.  In general, borrowers in the BSR program consolidate their loans immediately after rehabilitation in order to take advantage of the longer-term repayment plans that are available on FFEL consolidation loans.  It is because they agree to consolidation that they can qualify for rehabilitation with smaller monthly payments.

• Requirements to consolidate a defaulted loan:  "Except for Forced-ICRP consolidations (see section 2 of this Chapter), borrowers must make a full, timely, voluntary payment of an approved amount each month for 6 consecutive months in order to qualify for consolidation."
  • 1% of final consolidation payoff balance is automatically considered "reasonable and affordable."  Between 0.5% and 1.0% must be justified by financial status form
  • What are ICRP (income-contingent repayment plan) consolidations?  "The PCA may be paid an administrative resolution fee for consolidations where the borrower did not make six consecutive payments equal to at least .5% of the final consolidation payoff balance if the borrower consolidates through the Direct Loan program and chooses the income contingent repayment plan (ICRP)."
    • The ICRP payment calculator will determine eligibility for this plan: http://www.ed.gov/offices/OSFAP/DirectLoan/RepayCalc/dlentry2.html

• Administrative Wage Garnishment (AWG) and Litigation seen as two last resort efforts to collect on the debt.
  • AWG: Allows for the offset of fifteen percent (15%) of the disposable pay of employed individuals who have defaulted on their student loan obligations.
    
    • All borrowers subject to AWG can have a hearing:  "All borrowers subjected to AWG, have the opportunity to challenge the AWG order or have the
      garnishment payments stopped or reduced through a formal AWG hearing process.  Hearings may be timely or untimely and can be conducted in writing, in-person, or telephonically."
  • Litigation:  
    • Minimum principal balance:  $600 for Private Attorney Pilot Project (PAPP) and $45,000 for regular DOJ offices
    • Zip codes matter:  "There are certain zip codes for which the Department of Justice (DoJ) is using private attorneys to seek judgments on uncollected debts owed to the Federal Government.  DoJ's private attorneys’ usually give prompt attention to any referrals from DoJ. Thus, litigation preparations for borrowers in these zip codes may be more likely to result in judgments or repayment. This information may be of use in your efforts to counsel certain borrowers in the wisdom of working out repayment arrangements with the PCA."
      • http://www.fsacollections.ed.gov/contractors/pca2004/cotr/ZIPCode.2006.xls

If you made it this far, I applaud your persistence!