Obama Administration Cuts Financial Incentive for Student-Loan Debt Collectors

March 19, 2013

Starting this month, private collection agencies that chase delinquent student loans will see lower commission rates as part of the Obama administration's effort to ease the financial burden on borrowers.

The administration cut the commissions paid to the private collection companies to as low as 11 percent, according to Bloomberg News.

Previously, if collection agencies could persuade borrowers to make high monthly payments, the U.S. Department of Education would pay commissions as high as 16 percent of the entire loan amount—an arrangement that consumer advocates said created a financial incentive for the agencies to pressure borrowers.

Many borrowers have long complained that the federal government does not provide enough oversight of the agencies, and that the department's pay structure encourages agencies to push for high payments, even when the borrowers qualify for lower amounts. Complaints about the collection agencies have grown by 45 percent over the last five years.

The task of enforcing debt-collection law previously fell largely to the Federal Trade Commission. But that changed when Congress created the Consumer Financial Protection Bureau, in 2011. Now the commission and the bureau have the authority to take action in cases of collection abuse.

The bureau proposed a rule on March 14 that would give it the authority to supervise certain private agencies to ensure their compliance with federal consumer-financial laws.

A recent report from the bureau also cited complaints about private lenders from student-loan borrowers, saying they had received conflicting instructions about repayment and had been unable to reach the appropriate staff members to answer questions.

The bureau's proposed rule would give it oversight of nonbank student-loan servicers that each handle more than one million borrower accounts. The rule would affect the seven largest student-loan servicers, which together handle 49 million borrower accounts.