The debt collector on the other end of the phone gave Oswaldo Campos an ultimatum:
Pay $219 a month toward his more than $20,000 in defaulted student loans, or Pioneer Credit Recovery, a contractor with the U.S. Education Department, would confiscate his pay. Campos, disabled from liver disease, makes about $20,000 a year.
“We're not playing here,” Campos recalled the collector telling him in December. “You're dealing with the federal government. You have no other options.”
Campos agreed to have the money deducted each month from his bank account, even though federal student-loan rules would let him pay less and become eligible for a plan -- approved by Congress and touted by President Barack Obama -- requiring him to lay out about $50 a month. To satisfy Pioneer, Campos borrowed from friends, cut meat from his diet and stopped buying gas to drive his 82-year-old mother to doctor's visits for her Parkinson's Disease.
With $67 billion of student loans in default, the Education Department is turning to an army of private debt-collection companies to put the squeeze on borrowers. Working on commissions that totaled about $1 billion last year, these government contractors face growing complaints that they are violating federal laws by insisting on stiff payments, even when borrowers' incomes make them eligible for leniency.
Education Department contracts -- featuring commissions of as much as 20 percent of recoveries -- encourage collectors to insist on high payments. Former debt collectors said they worked in a “boiler-room” environment, where they could earn bonuses of thousands of dollars a month, restaurant gift cards and even trips to foreign resorts if they collected enough from borrowers.
In failing health, after contracting hepatitis from a blood transfusion, Campos pleaded with Pioneer, owned by SLM Corp. (SLM), the nation's largest student-loan company better known as Sallie Mae. He left a $40,000-a-year job at the Massachusetts health department when he got too sick to work and waited for a liver transplant. The 52-year-old former busboy, a naturalized U.S. citizen from El Salvador, earned bachelor's and master's degrees in the 1990s from Cambridge College in Massachusetts.
“I know I owe this money and I want to pay it back -- I just can't,” Campos said, his eyes filled with tears, during an interview at the Boston social-services agency where he works six hours a week leading court-ordered classes for drunk drivers.
Debt collectors are the subject of more complaints to the Federal Trade Commission than any other industry -- almost 181,000 last year. Within the past 17 months, three companies working for the Education Department -- including one that is majority owned by JPMorgan Chase & Co. (JPM)'s private-equity arm -- settled federal or state allegations of abusive debt collections. The companies didn't acknowledge wrongdoing, and Chase declined to comment. The Education Department said the government investigations didn't involve the companies' work for the agency.
The U.S. Consumer Financial Protection Bureau, created in 2010 in the wake of the credit crisis, has proposed supervising the largest debt collectors to ensure they are complying with laws such as the Fair Debt Collection Practices Act. About 5 million federal education-loan borrowers are in default, generally meaning they have failed to make payments for 270 days or more.
“With student-loan defaults rising, we want to make sure borrowers clearly understand their loan-repayment options and debt collectors are following the law,” Rohit Chopra, the agency's student-loan ombudsman, said in an e-mail.
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Federal-aid law requires collectors to offer “reasonable and affordable” payments, so debtors can “rehabilitate” their loans, repairing their credit and making good on what they owe taxpayers.
The law mandates no minimum payment for a borrower to enter a rehabilitation program, and collection companies may take borrowers' finances into account. The fair debt act forbids collectors from making “any false, deceptive or misleading representation.”
Insisting that cash-strapped borrowers make minimum payments and then failing to disclose lower-cost options violates both federal-aid and fair debt-collection laws, according to Deanne Loonin, an attorney with the Boston-based National Consumer Law Center.
Debt collectors said they follow federal laws and use all available tools to recover money for taxpayers. The companies are helping to make sure that future college students have access to financial aid, said Mark Schiffman, spokesman for ACA International, a Minneapolis-based industry trade association.
$1 Billion Commissions
Debt-collection companies helped the Education Department recover $11.3 billion in defaulted loans during the year ended Sept. 30. The agency projects it will collect 85 cents on every dollar that defaults, factoring in collection costs and the time-value of money.
The debt collectors made out well, too. Based on a review of government contracts and Education Department data, the private companies -- working directly for the government and through state agencies -- received commissions of about $1 billion in the year through September.
Sallie Mae and the Education Department declined to answer questions about Campos's comments. The company cited privacy rules and the terms of its government contracts. Newark, Delaware-based Sallie Mae said it works with borrowers in financial difficulty and offers lower payments when appropriate.
“We have helped thousands of student-loan customers in default get back on track to fulfill their obligations, giving consumers the opportunity to improve their credit and providing cost savings for the American taxpayer,” Patricia Nash Christel, a Sallie Mae spokeswoman, said in an e-mail.
The Education Department this week will hold meetings with industry, government and consumer representatives to consider requiring that debt collectors automatically offer payments based on income to defaulted borrowers who qualify. If approved, the rules could take effect in July 2013.
“We want to make sure we are striking the right balance between helping borrowers who have hit hard times and honoring our responsibility to be good stewards of taxpayer dollars,” Justin Hamilton, an Education Department spokesman, said in a phone interview.
To protect customers, the department randomly monitors tape recordings of student-loan debt-collection calls, Hamilton said. The department is also considering changing the commission structure in its debt-collection contracts, he said.
The agency encourages students to file reports if they feel mistreated, Hamilton said. In the year ended in September, the department received 1,406 complaints against the debt collectors it hires, up 41 percent from the year before.
Under U.S. law, student loans can rarely be discharged, even in bankruptcy, making them more difficult to shake than credit cards or past-due mortgages. The government can also confiscate tax refunds and Social Security payments, as well as paychecks.
“Student-loan debt collectors have power that would make a mobster envious,” Harvard Law Professor Elizabeth Warren, who helped establish the Consumer Financial Protection Bureau and is now running for a U.S. Senate seat from Massachusetts, said in 2005.
Under Education Department contracts, collection companies “rehabilitate” a defaulted loan by getting a borrower to make nine payments in 10 months. If they succeed, they reap a jackpot: a commission equal to as much as 16 percent of the entire loan amount, or $3,200 on a $20,000 loan.
These companies receive that fee only if borrowers make a minimum payment of 0.75 percent to 1.25 percent of the loan each month, depending on its size. For example, a $20,000 loan would require payments of about $200 a month. If the payment falls below that figure, the collector receives an administrative fee of $150.
That differential provides an incentive for collectors to insist on the minimum payment and fail to reveal when borrowers are eligible for a more affordable schedule, according to Loonin, the attorney at the National Consumer Law Center, which is representing borrowers in the Washington talks with the Education Department
Customers benefit from successfully rehabilitating a loan, because they repair their credit, and the government removes thousands of dollars in fees and collection costs, the Education Department and Sallie Mae said. Taxpayers, rather than borrowers, pay the rehabilitation commission, according to the agency. Students who immediately sign up for income-based plans, through a program called consolidation, don't get those benefits, Sallie Mae and the Education Department said.
Debt collectors are under pressure to extract as much money as they can up front, or lose their jobs, said J.C. Cournan, who worked for Pioneer Credit Recovery from 2004 through 2007.
Collectors, then paid about minimum wage, could earn thousands of dollars a month in bonuses, based on the money that borrowers repaid, said Cournan, who took the upstate New York job out of high school. Pioneer set monthly goals for wage garnishments and loan rehabilitations, he said.
Using automatic dialers to track down borrowers, Cournan would figure out where they worked, then contact their employers. He would tell borrowers that he was going to seize part of their wages if they didn't make the payments. Using a company loan calculator, Cournan would insist on the minimum payment, he said.
“When wou're making 8 bucks an hour, it's all about the bonuses. You're starving,” said Cournan, 26, now an auto mechanic.
Gift Cards, TVs
Pioneer maintained a “boiler room” environment, with high turnover among those who didn't perform, said Joshua Kehoe, a former collector. Kehoe worked in Batavia, New York, from July 2006 through October 2008 after managing a pizza stand at a theme park.
Pioneer rewarded collectors with $100 restaurant gift cards, a $500 mahogany jewelry box, televisions and a trip to the Dominican Republic, according to Kehoe, who said he earned $9.60 an hour before the incentives.
It would be “a cold day in Hades” before collectors would tell borrowers about options with lower payments, according to Kehoe, who said “rehab cash was king.” The company pushed collectors to sign borrowers up for the rehabilitation plans, which often required payments equal to 1.25 percent of their loan amount monthly, he said.
“It was hard on my mind -- it was hard on my heart,” said Kehoe, 25, who now works as a welder in Akron, New York. “There was the guy with one leg or the single mom with five children.”
Under pressure to meet collection goals, Kehoe falsified documents for verifying the employment of borrowers who were subject to wage garnishment, he said. Pioneer discovered the violation and dismissed him, Kehoe said.
Sallie Mae declined to discuss the former employees' comments. The company uses a mix of hourly pay “substantially above minimum wage” and performance-based incentives, said Sallie Mae's Christel.
Like other debt collectors, “we design a compensation system that pays for good performance,” Christel said. “We take compliance seriously and design our policies and practices to meet all applicable fair debt collections laws and federal government service contract requirements.”
The Internal Revenue Service in 2009 stopped using private debt collectors, saying its own employees were more cost effective and flexible for taxpayers facing economic hardship.
‘IRS Was Better'
The IRS let Campos, the Boston student-loan debtor, set up a payment plan he could afford when he fell behind on his taxes, he said.
“The IRS was better,” Campos said. “They bent over backwards to help you.”
The Education Department will “definitely want to take a look” at IRS collections to see “what their experience has been,” Hamilton, the Education Department spokesman, said.
Twenty-three collection companies work directly for the Education Department. Most of the same outfits have contracts with state guarantee agencies that also chase student-loan borrowers on the government's behalf.
In the past 17 months, three companies have run afoul of federal and state investigators, though the Education Department said their inquiries didn't involve their government student- loan business.
During this period, Minneapolis-based Allied Interstate Inc. and Atlanta-based West Asset Management Inc. paid $1.75 million and $2.8 million, respectively, to settle lawsuits alleging abusive debt collection filed by the Federal Trade Commission. The companies admitted no wrongdoing. In February, to resolve an investigation by 19 state attorneys general, NCO Group, majority-owned by JPMorgan Chase, agreed to pay $575,000 and provide up to $50,000 per state for consumers who can show wrongful collections. The companies admitted no wrongdoing.
Allied has taken steps to correct mistakes -- primarily repeated phone calls to wrong numbers -- and complaints have fallen, Robert Burke, vice president for marketing of iQor Inc., the company's parent, said in an e-mail.
West disagreed with the FTC's findings, Deputy General Counsel Greg Hogenmiller said in an e-mail. Consumers haven't made claims to NCO since the attorneys general settlement, and no wrongdoing was found, Ronald Rittenmeyer, chief executive officer of Horsham, Pennsylvania-based NCO, said in an e-mail.
The collection business is booming as defaults more than doubled since 2003, along with outstanding federal student loans, which totaled $848 billion as of Sept. 30, surpassing credit-card debt.
The U.S. loan program was born in 1965 as a “Great Society” initiative for lower-income students under President Lyndon Johnson. Today, with tuition soaring, two-thirds of college seniors graduate with loans, which average $25,000, according to the Institute for College Access & Success, an Oakland, California, nonprofit education and advocacy group.
Obama -- supported by Congress -- has pledged to give borrowers a break and make college more affordable.
In 2009, Congress expanded a program that lets lower-income students tie payments to their incomes. It's a sliding scale, based on their debt, salaries and family obligations. Married borrowers with two children, $30,000 in income and $30,000 in student loans wouldn't have to make any payments, according to a government loan calculator. If circumstances don't improve, the loans can be canceled after 25 years.
In October, Obama proposed making payments even lower and forgiving loans after two decades for some borrowers, as soon as this year.
Kimberly Noland could have used that kind of help.
Noland, 44, lives in Fayetteville, Arkansas, with her husband, a laid-off factory worker now employed at a Wal-Mart store, and their seven-year-old daughter.
Noland injured her leg while working in a day-care center. She started collecting $828 a month in Social Security disability payments in 2010.
Shortly after she qualified, Collection Technology Inc., an Education Department debt collector, called about Noland's roughly $30,000 in defaulted student loans from attending the University of Arkansas.
A collector told her she had to pay $325 a month, almost as much as her rent, Noland said in a phone interview. She couldn't afford it on her family's $20,000 annual income, she said.
“I have a child,” Noland remembered telling the collector. “I can't give you every bit of money in my house.”
“This is our final number,” the collector replied, saying her boss wanted even more, according to Noland. The phone conversation lasted more than an hour, she said. She was given three days to decide, or Collection Technology would seize part of her disability check “forever,” and she would never have another chance to rehabilitate her loan, Noland said.
She bought a prepaid debit card at Wal-Mart, authorizing Collection Technology to make the $325 monthly withdrawals. She visited churches to collect free bread and canned goods.
“I didn't know why it had to be such a high dollar amount,” Noland said. “They have the power, I guess. You do what you have to do to make them happy.”
Chris Van Dellen, CEO of Collection Technology in Monterey Park, California, referred questions about Noland's comments to the Education Department, which declined to discuss her case.
In October, Noland and her husband filed for bankruptcy. Last year, she qualified for the Education Department's income- based plan. Her monthly student-loan payment: zero.