A new contract between the U.S. Department of Education and the 22 private debt collection agencies it employs to recover past due payments features a shift in the commission structure paid to the collectors that will result in a lower overall rate, according to Bloomberg.
The financial news outlet obtained a copy of the new contract under a Freedom of Information Act (FOIA) request and noted that the commission structure change targets the rehabilitation program, set up so that delinquent borrowers can bring their account back to current after making a certain number of on-time payments.
The old commission structure was tiered. If a debt collection agency could get a consumer to make monthly payments for nine of 10 months equal to at least 0.75 percent of the outstanding loan balance per month, they would be eligible for a commission of 16 percent of the loan balance. But if the monthly payments dipped below that threshold, the contractor would receive just a $150 administrative fee.
Under the new contract, collectors would receive an 11 percent commission for rehabs regardless of the size of the payments, according to Bloomberg.
But it’s unclear whether this new structure would lead to an overall lower effective commission rate for rehabs. It frees collection agencies up to work with lower income borrowers on a plan they can afford to bring the account current and still receive an 11 percent commission rather than a $150 fee. Payments can now be based more on a consumer’s income than under the previous system.
The new student loan debt collection contract terms are the latest move by the Obama administration to ease the burden of student loan payments on recent graduates finding themselves with heavy debt burdens and a stubbornly tight job market.
In 2011, President Obama issued an executive order accelerating a Congressional plan to cap payments on federal direct loans at 10 percent of borrowers’ discretionary income.