Breakdown of Student Loan Collection Account Fees

                                             

Collection agencies are almost as ruthless as the IRS. Collection agencies are for-profit - solely driven by profit, and ultimately consumers are paying the price. Collection agencies help companies receive outstanding money owed to companies that they have been unsuccessful in collecting.

How Collection Agencies Charge for Their Service
Collection agencies have various ways of charging for the work they do for clients. One way is through “debt buying” where the agency purchases the debt in whole from the original creditor. The collection agency purchases the debt for a significantly lower amount than the debtor owes, and the original creditor gets to write off the loss on their taxes. Once a collection agency purchases the debt, they contact the debtor and attempt to collect the debt, keeping the amount collected.

Agencies can charge a simple flat rate, a percentage of the debt collected, a percentage-based fee - a percentage of the amount collected as their fee up to 50% of the paid amount, a contingency fee - companies don’t get paid until the debt is paid, fees can range from 15% to 40%; or fixed prices - requires payment of a monthly fee for a specific period of time, i.e. $10/month for one year.

Collection agencies calculate their fees based on the age the debt. The longer the debt has gone unpaid, the greater the fee that can be charged. The age of the debt can be calculated from the last day of activity on the account. A collection agency may charge an additional fee for their services such as background checks, filing fees, long-distance phone calls, mailing, court costs, etc.

How Collection Agencies are Paid by the Department of Education

According to the 2014 Pounding Student Loan Borrowers: The Heavy Cost of the Government’s Partnership with Debt Collection Agencies, a report produced by the National Consumer Law Center’s Student Loan Borrower Assistance Project, the Department of Education rewards the collection agencies based on the total amount of money collected from student loan borrowers, regardless of the harm caused to student loan borrowers and regardless of legal compliance.

The Department of Education uses a scoring system to rate collection agencies (referred to as contractors). The three contractors with the highest score receive additional performance compensation, which can be up to several million dollars a year for the top contractor.

Fees Charged on Student Loans

Student loan borrowers are liable for costs of collecting defaulted loans pursuant to the Higher Education Act and the terms of most borrowers’ promissory notes. According to Department of Education’s web site, “…The contractors earn a commission, or contingent fee, for any payments made on those loans. The Department charges each borrower the cost of the commission earned by the contractor, and applies payments from that borrower first to defray the contingent fee earned for that payment, and then to interest and principal owed on the debt. The amount required to satisfy a student loan debt collected by the Department of Education’s contractors can be up to 25% more than the principal and interest repaid by the borrower.”

This method of applying payments is similar to using a debt consolidation company where payments are applied to the fees first the remaining amounts paid towards the principal and interest. Collection agencies receive a commission on a student loan payment as long as the agency has been assigned the file, whether or not payments were collected.

As of July 1, 2014, fees are limited to 16% for rehabilitation of student loans. The limit is 18.5% for consolidation loans. The Department of Education states that it waives the fees for rehabilitations on Direct Loans. In July 2015, the Department of Education clarified that borrowers that enter into repayment arrangements after default should not be charged collection fees. However, this is not enforced.

Perkins Loans collection fee limits are 30% of principal, interest and late charges for first collection efforts and 40% for subsequent collection efforts. Collection charges on a defaulted Perkins loan repaid through rehabilitation are capped at 24%. Collection charges on defaulted federal Stafford, PLUS and consolidation loans is 19.58% of the payment.

Federal Laws Regarding Collection Agency Fees

Based on federal law under the Fair Debt Practices Collection Act:

The addition of any interest, services fees, collection costs or other expenses associated with the original debt is permitted when “such amount is expressly authorized by the agreement creating the debt or permitted by law.” 15 U.S.C. 1692f(1) [§ 808(1)].

Section 484A(b) of the Higher Education Act of 1965 [20 USC 1091b(b)] specifies that borrowers who have defaulted on federal student loans shall be required to pay "reasonable collection costs". Reasonable collection costs are defined in the regulations at 34 CFR 682.410(b)(2) as including attorney's fees, collection agency charges and court costs.

The costs the Department of Education impose on delinquent debtors includes: costs associated with the collection of a particular debt, salaries of employees performing Federal loan servicing and debt collection activities, telephone and mailing costs, costs for reporting debts to credit bureaus, costs for purchase of credit bureau reports, costs associated with computer operations and other costs associated with the maintenance of records, bank charges, collection agency costs, court costs and attorney fees, costs charged by other Governmental agencies, the fee to pay the agency for its collection services, commission rate paid to the collection agency.

State Laws Regarding Collection Account Fees

You CANNOT add collection fees to accounts located in: Washington DC; Idaho; Louisiana; North Carolina; North Dakota; Puerto Rico; South Carolina; Tennessee; Wisconsin, Wyoming; Guam (unless debt is over $25K); Hawaii (except for contracts by University of Hawaii, or unless lawsuit filed); Missouri (unless consumer debts is over $1,000); Oklahoma (for consumer loans); Washington (for consumer loans); and West Virginia (except for student loans).

If there is no state law and collection fees are stated in the student loan contract, collection fees are allowed for accounts in the following states: Alabama; Alaska; Arkansas; Florida; Indiana; Kentucky; Maryland; Mississippi; Montana; New Jersey; New Mexico, Ohio; South Dakota; and Virginia.

If the state law permits it, and fees are in the student loan contract that is based on the FDCPA, collection fees are allowed in the following states: Arizona; California; Connecticut (limited to 15% of the amount actually collected on the debt); Colorado; Delaware (limited to amount actually incurred by creditor); Georgia; Illinois (amount is not “unreasonable”); Iowa (“reasonably related to actions taken by the debt collector”); Kansas (limited to 15%; Maine; Massachusetts; Michigan; Minnesota (bearing a “relationship to the actual costs of collecting on the account”); and Missouri (allowed only on consumer debts greater than $1,000).

The following states have limits on the amount of collection fees allowed by allowing only for the addition of only ACTUAL COLLECTION COSTS to the debt, however some collection agencies take advantage of this loophole by adding the collection fees upfront to the principal balance: Connecticut (limited to 15% of the amount collected); Delaware (collection costs recoverable only to the extent they are actually incurred); Idaho (limited to 50% of amount collected); Kansas (limited to 15%); Nevada (collection fee must be either added to principal balance by the creditor before assignment to collection, or added to the principal by the collector and described as such in the first written communication with the debtor); Utah (collection fee cannot exceed the lesser of (a) the actual cost paid to debt collector; or (b) 40% of the principal amount owed); Washington (only allowed on commercial debts and amount cannot exceed 35% of the claim); West Virginia (only allowed on student loans with West Virginia and cannot exceed 33.33% of principal amount).