Student loans are often considered to be good debt because they help you to improve your job prospects. However, this designation as “good debt” is only true as long as you can actually make payments on your loans. If you fall behind or become unable to pay, student loans are the worst type of debt you can have since they are not eligible for forgiveness in bankruptcy except under extremely dire circumstances where you have no hope of ever being able to pay back what you owe.
Not only can student loans not be discharged in bankruptcy, but the law actually provides student loan lenders with many means of recovering back loan debt including seizing tax returns and even garnishing the social security checks of seniors with outstanding student loan payments.
With all of the protections to student loan lenders, it is no wonder that debt collectors have begun cashing in on student loan defaults in a big way.
Collectors Cashing In On Student Loans
According to a recent article in the New York Times, nearly one out of every six student loan borrowers is currently in default on their student loans. This means that there are more than $76 billion in student loans in default as of September 2012.
Government agencies who hold these defaulted loans aren’t sitting back and waiting for struggling students to pay. The U.S. Department of Education has their own collection efforts in place, and they are increasingly turning to professional debt collection agencies for help. In fact, the New York Times reports that they paid out more than $1.4 billion last year to collection agencies to hunt down those who are in default.
These collection agencies, which traditionally hounded people for bad credit card debts and other personal debts, are jumping in full force and taking advantage of the huge opportunity to harass, intimidate and otherwise coerce struggling students into paying back as much as they can eke out of their meager paychecks.
Debt collectors are benefitting especially from this new wave of student loan defaults, with one collection agency referring to them as a “great opportunity” and as a “new oil well” for the industry responsible for debt collection.
Debt collectors use many techniques to find delinquent student borrowers and to attempt to collect on unpaid student loan debt. One of the primary roles of debt collectors is to search public records databases and find people who have disappeared without making their payments. A credit check as a result of an account being opened, a new bank account, a new job or any other information that goes in public records can alert a collector to the whereabouts of a defaulter. Because there is no statute of limitations on the collection of student loan debts, debt collectors are even able to use these methods to find people who defaulted decades ago and to collect not just principle but also interest and penalties, maximizing their profits.
In addition, debt collection efforts are often especially fierce when it comes to recovering student loans in default because of the special options available only to student loan lenders. As a result of the special rules applicable to student loans, the average recovery rate is eighty cents per dollar on defaulted student loans, while most lenders who have defaulting borrowers recover at most twenty cents on the dollar for their collection efforts.
What Struggling Borrowers Can Do
If you are one of the students who is being contacted regularly and pursued by debt collectors, you have limited options available to you. Students have told the New York Times that changing their phone numbers don’t work, and that debt collectors continue to find them. Bankruptcy isn’t an option, and those struggling with student loans are seeing their credit ruined and are falling even more behind thanks to penalties and fees.
If you are in this situation, your best option is to speak directly to your lender or to find a counseling service that can help you to explore repayment solutions. Putting the loans into default or choosing an income based repayment method may be one solution, but it is important to remember that you typically will have to find some way to work out repayment on your debt since the student loans simply aren’t going away under the state of the current law.