Predatory Institutions: Student Loan Collections at Public Institutions

September 22, 2021

Predatory Institutions: Student Loan Collections at Public Institutions

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Students should know their rights when it comes to student loans. Predatory institutions sometimes send student loans to collections illegally.

Predatory institutions mislead students and do not fulfill promises. Most are for-profit colleges. Sometimes, government-funded institutions send unpaid student loans to for-profit collection agencies. These collectors may conduct unethical practices.

Students with significant student loan debt are especially at risk. According to a 2020 paper by Aspen Institute, 21% of African American borrowers are behind on student loan payments. Only 6% of white borrowers are behind on payments.

In addition, white borrowers have a 22% default rate. Black borrowers have a 49% default rate. Native American or Alaska Native borrowers have a 41% default rate, while Hispanic and Latino borrowers have a 36% rate.

The paper also showed that student loan debt disproportionately impacts women. Women hold two thirds of all outstanding student loan debt. They also take on more debt than men across all degree types.

Students should know how to avoid predatory student loan collections. This page explores predatory techniques to watch for and how to file a formal complaint.

When Can a Student Loan Go to Collections?

Student loans can go into default if a borrower does not make an on-time payment. Different loans feature different default policies.

For example, the William D. Ford Federal Direct Loan Program considers loans without scheduled payments for 270 days as defaulted. The Federal Family Education Loan Program follows the same policy. But if you miss one payment with the Federal Perkins Loan Program, your loan goes into default.

These loan providers send defaulted loans to collection agencies. These for-profit businesses may use aggressive tactics to get the missed payments.

Public schools in every state except Louisiana legally use for-profit debt collection agencies. Overdue tuition and parking ticket fines can go to collections. Most colleges add late fees. Collection agencies can add an extra 30-40% fee.

Learners should avoid scammers posing as student loan collectors. Always contact the student loan lender or school directly to learn the assigned collection agency.

Loan Collection Agencies: Illegal Predatory Techniques

Debt collectors can legally go to collection agencies for late payments. But they cannot legally use abusive collection practices. The Fair Debt Collection Practices Act prevents collectors from making threats or using deception.

Debt collectors cannot use obscene language when communicating with borrowers. They may not publicly advertise a student's debts. In addition, debt collectors must clearly identify themselves on the phone. If debt collectors mistreat you, report them. Contact the Federal Trade Commission (FTC) or the Consumer Financial Protection Bureau (CFPB). Your state's attorney general may also assist.

Some states protect borrowers from getting sued for old debts. Check with your state's court website to discover the statute of limitations on loan debt.

Collecting on Outdated Loans

Debt collectors may try to illegally collect on outdated student loans. In 2017, the U.S. government ordered Transworld Systems Inc to pay $21.6 million. This debt collector had attempted to collect nonexistent or outdated loans.

Why would debt collectors knowingly collect on outdated loans? They might not know the loans are outdated. The age of loans that collectors can pursue varies. This makes it harder for borrowers to know their rights. Get to know your state's statute of limitations on debt. This chart provides information.

Debt collectors can also illegally collect outdated loans because of mistakes. When debts get passed between collectors, information can get miscommunicated.

Contacting People Other Than the Borrower

Debt collectors may call a borrower's relatives. This creates further pressure on the borrower to pay the loan.

The CFPB offers information on this topic. Debt collectors may legally contact family members. But they may only do so to get the borrower's contact information. They cannot discuss details about your debt with these individuals. In addition, they may only contact each family member once. It is illegal for debt collectors to coerce a third party to pay a borrower's debt.

The Telephone Consumer Protection Act prevents predatory student loan collections from impacting your family. The act makes it illegal for debt collectors to make unauthorized robocalls. This law applies to borrowers and their family and friends. When a debt collector pursues debts, the call must come from a live person.

Contacting Repeatedly at the Wrong Hours

Collectors may keep calling at inconvenient times. These times could fall early in the morning or in the middle of the night. Collectors may also call your business during regular operating hours. Let's examine these examples and the law.

Debt collectors cannot legally contact you multiple times a day due to the FDCPA. If you receive three or more calls per day, document them with screenshots. Then, seek legal counsel.

The FTC offers more information. For example, collectors cannot contact you without permission before 8 a.m. or after 9 p.m. They also cannot legally contact you at work without your approval.

Lying or Withholding Information

According to the FDCPA, collectors must reveal the agency they represent. If they do not, it counts as a predatory student loan collections practice.

Collectors must also notify the borrower in writing five days before calling. This email or letter must include the debt amount and the creditor's name. The writing should also list the amount of debt in collections. The borrower has 30 days to dispute this amount.

Collectors must also answer questions honestly and present true information. When speaking to a dishonest collector, do not reveal your personal financial information. Stay calm and do not admit that the debt is valid. Instead, contact an organization like the CFPB.

Loan Collection Agencies: Legal Techniques to Watch Out For

Loan Resets

A lender may offer a loan reset on a deferred loan. This resets your loan's terms and may increase the interest rate. Loan resets differ from loan refinancing. When you refinance a loan, your old loan gets paid off and replaced with a new loan.

Lenders and collectors use loan resets to prevent a person's debt from becoming too old to collect. Avoid agreeing to a loan reset if your loan is close to becoming time-barred. Contact your state's attorney general to learn your state's statute of limitations.

Predatory installment lending is similar to a loan reset. Most states limit how much lenders charge for interest rates on payment installments. Missouri and Delaware do not restrict interest rates.

Wage Garnishment

Wage garnishment can happen to individuals with delinquent loans. A loan collection agency may legally withhold up to 15% of disposable pay to cover the loan. They can do this without taking the lender to court. This continues until the lender pays off the loan or the loan default status resolves.

At least 65 days before the garnishment, the collection agency mails the borrower a notice. To avoid wage garnishment, learners should avoid taking out student loans they do not need. Calling the lender and negotiating a payment plan can prevent wage garnishment. Most lenders negotiate with individuals who make a payment within 30 days.

The government may garnish the borrower's tax return on defaulted federal loans. The Federal Student Aid Office publishes resources on how to avoid wage garnishment.

Added Collection Fees and Late Fees

When a student loan debt goes to collections, extra fees get added. For example, loans from the U.S. Department of Education (ED) that go to a collection agency may increase up to 17.92%. This increase covers the collection agency fees.

The government can charge late fees on ED loans. However, the government has not done this since the direct loan program began.

Avoid paying collection and late fees by applying for an income-driven payment plan. This plan accounts for the borrower's salary and increases when the salary increases.

Collections and late fee laws vary by state. For example, in Ohio, collection agencies cannot charge borrowers with collection or late fees. They charge the loan servicer who then charges borrowers.

How to File a Formal Complaint About Student Loan Collections

People experiencing predatory student loan collections should learn their legal rights and protections. Always report predatory practices. The FTC or a state attorney general can help people file reports.

The CFPB can also assist. The organization hosts an online form for submitting a complaint. ED loan borrowers may report predatory practices at the feedback center.

People should only go to these groups for certain complaints. For example, you could report multiple collection calls late at night. You could also file a complaint if an agency tries to collect on an outdated loan.

If something seems suspicious, file a complaint. Be sure to communicate with your lender. Many lenders prefer to work with borrowers to avoid a loan default.

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