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Paper Abstract: Discusses loan default rate; collection strategies; costs; outsourcing loan collection. 1 chart. Paper Introduction: This research explores positive aspects of the collection of delinquent student loans in the USA. The research will set forth the context in which delinquent-loan collection has emerged and the scope of the delinquency problem and then discuss the financial benefits of a well-managed collection project. In fiscal year 1995, the U.S. Department of Education held about $8.5 billion in delinquent federally guaranteed student loans (Dockter, 1998, p. 4). In fiscal 1996, the federal government paid to private-sector lenders $2.662 million in loan-default guarantees on Federal Family Education Loans (FFEL), a 16% increase from the previous year, bringing the 10-year cumulative total of student loan defaults, or receivables, to about $28.9 million. By comparison, only $15.2 million in FFEL Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Contrary to the pattern in most industries, employment of bill and account collectors tends to rise during recessions, reflecting the difficulty that many people have in meeting their financial obligations. Early-out servicing of client accounts is oneaspect of this; indeed, some agencies function as billing services. When they get a job they resume payments (ACA, 2 ). In FY1999 alone, the Department of Educationcollected $2.2 billion in defaulted loans, consolidating another $86 million in defaults in order to reschedule debt. Bureau of Labor Statistics reported in early 2 thatemployment in the collection agency field is expected to grow by 36 percentthrough 2 6. Gose, B. (1997, October 3). If the federal budget were to balance or go into deficit, subsidy costs would turn around dramatically. Subsidy figures reflect only default costs per se, not the administrative costs--such as employee training, telephone costs, record-keeping costs, and opportunity costs in other administrative down time--of the debt-collection process. However, the rules calculate administrative costs as all costs inthat year to support all loans, regardless of when they were made. U.S. References American Collectors Association. $6,855 at Two-year private institutions . Best of times--for bill collectors.U.S. In fiscal year 1995, the U.S. Government agencies are increasingly using third party collection agencies to collect on everything from parking tickets to child support payments and overdue taxes. (1997, November 21). State-of-the-art call-center, auto-dial, and Internet technology enables collectors to achieve economies of scale when making contact with debtors; computerized dialing equipment allows collectors to dial several debtor numbers at the same time (Sherrid, 2 ). The U.S. In 2 , 49 schools with high defaultrates may lose student aid eligibility altogether (Riley, 2 ). 1 % of the wages of persons in default may be garnished to satisfy the collection. Educational institutions clearly have a financial stake in seeing that their students repay their loans in a timely way. Retrieved from theWorld Wide Web 31 July 2 , athttp://www.whitehouse.gov/WH/Accomplishments/numbers.html. Los Angeles:American Entrepreneurs Association. As of September 1997, the average cost of college tuition and feesfor a first-year full-time undergraduate had risen by 5% for the 1997-98school year, according to the College Board's annual survey of tuition andfees charged by some 3, American institutions (Gose, 1997). When a refund is owed to a married taxpayer but there is a delinquent student loan involved, all or part of the joint filers' overpayment of tax may be used to pay the debt, and obtaining a refund for nondelinquent spouse's share of the overpayment involves a lot of time and red tape (Karl, 1999). (2 ). Incorporating federaladministrative costs into FFEL and direct loan program cost estimates.Washington, D.C.: USGPO. The research will set forth thecontext in which delinquent-loan collection has emerged and the scope ofthe delinquency problem and then discuss the financial benefits of a well-managed collection project. . Third-party debt collectors free up overworked government personnel and stretched resources to focus on administrative duties undistracted (Dockter, 1998). . AmericanCollectors Association sees continued growth in collection industry through2 6. Consider these issues: . The rules calculate subsidy costs asthe net present value (NPV) of costs over the life of loans made in a givenyear. Chronicle of HigherEducation, 42, A37-44. (1998, August 1 ). Thus the collectionagency's services in no way cut into the full repayment of a student'sdirect or guaranteed loan, including interest and penalties, that thefederal government receives. Investing in yourchild's future. Collectors' fees on studentloans come to 28% of the amount owed. Collection agency: AEA business manual no. Retrieved from the World Wide Web 26 July 2 ,at http://www.usnews.com/usnews/issue/ 214/debt.htm. It isconceivable that, in future, outsource collectors, or "collectioncontractors," as the Department of Education calls them, could take overthe full gamut of loan-payment tracking and monitoring, thus furtherprofessionalizing repayment and collection efforts and further relievingfederal administrators' burden. The costs of higher education have risen dramatically in recent years.In the 1994-1995 school year, when inflation stood at 2.6%, the cost of acollege education in the United States rose, on average, by 6% (Gose,1995). . (2 , February 14). (1996). Between 1998 and 2 8, the Bureau of Labor Statisticsreports, employment in the third-party collection-agency business isexpected to rise at a higher than average rate, compared to otherindustries: . In fiscal 1996, the federal government paid to private-sector lenders$2.662 million in loan-default guarantees on Federal Family Education Loans(FFEL), a 16% increase from the previous year, bringing the 1 -yearcumulative total of student loan defaults, or receivables, to about $28.9million. While that sounds like good news and sound financial management, itconceals the fact that the Credit Reform Act of 199 mandates calculationsof the net present value of administrative costs as well as federal"subsidies" over the life of a loan. Those payments are set bystatute and may not necessarily reflect actual costs of administration ofstudent loans. Tuition andfee averages were reported as follows: . In fact, thereverse is true. (1999, February). Unlike most federal agency employees, collection agencies are completely familiar with the Fair Debt Collection Practices Act, which governs collection practices by debt collectors. Professional collectors understand well that following the law is important. BLS expects more companies to improve their debt collection by contracting with third party collection agencies instead of trying to handle collections themselves. In the private sector, the fees arededucted from the amount that the client company receives. . of Education, 2 ,||p. To put it another way, the collection industry, especially in its current technology-driven form, can expect to grow in both good times and bad. Dunning the defaulters. Thus professional collectors relieve student-loan agency clients of the need to train and monitor agency staff in collection-related duties, in particular obviating special training in the dos and don'ts of collection protocols regarding debtor rights. NCO is a publicly tradedcompany (Sherrid, 2 ) Aggregate collection-industry revenues have been growing at about 1 %a year for several years in a row, reaching an estimated $1 billion in2 (Sherrid, 2 ). Students whose loans are collected through agencies are responsible not only for the debt but also for the agency fee, which may range from 25% to 28% of the default amount (Dept. That is because theunprecedented growth of the US economy that has taken place in recent yearsis not going to last forever. Saukko, B. Department ofEducation, 1996). The Department of Education already hasin place contracts with a number of collection agencies to pursue studentswhose loans have defaulted. BLS expects that the level of consumer debt will continue to rise . The largest collection agency inthe US is the NCO Group, based in Ft. Washington, Pa., but fielding 73separate call centers and some 9, employees. (1983). The New York-based ACS has contingent receivablesamounting to $8 million and says that 85% of that figure is in currentstudent-loan accounts. The American CollectorsAssociation (ACA) cites a national student loan survey conducted by NellieMae, a nonprofit provider of education loan funds, putting the average debtfor undergraduate and graduate students in 1997 at $18,8 , compared to$8,2 in 1991. Answers to 2 questions on dealingwith IRS collections. Increases in the cost of higher educationhave very much made student loans a fact of life (ACA, 1998). Department of Education held about $8.5billion in delinquent federally guaranteed student loans (Dockter, 1998, p.4). State-of-the-art database technology enables today's collectors to identify priority accounts quickly and thus make more contacts per day than in the past, thus increasing collector- hour efficiencies. The credit rating of persons in default may suffer, as creditors and collection agents report loan delinquencies to credit bureaus. Prepared statement regarding student loandefault rates. On the other and, this does not necessarilyimply that the need for collection agencies to continue efforts on behalfof repayment of federal student loans will likewise decline. Over the course of the 199 s, the number of smaller agencies ($1million or less in recoveries) has decreased, in part due to mergers andacquisitions, and the 1 largest agencies in the country increased theirmarket share from about 15% to nearly 45%. Consider current fiscal-year student-loan defaultsreflected in subsidy figures: |Federal Costs Per $1 , in Loans || |Direct Loans |FFEL ||Subsidy Costs |-$773 |$1,3 5 ||Federal | | ||Administrative Costs |$362 |$1 2 ||Total Program Costs |-$411 |$1,4 7 ||Note: Estimates reflect net present value of lifetime ||costs for loans made in FY2 (Dept. Dockter, J. The government also makes account-maintenance payments to FFEL guaranty agencies. As education costs continue to rise, loan activity shouldcontinue to increase as well. CPA Journal, 69, 46-51. 1). Department of Education, 2 ). Press Release, Department of Education. . | This chart illustrates that current budget rules--mandated by theCredit Reform Act of 199 --make "apples-to-apples" cost comparisonsdifficult (Dept. Riley, R.W. Default on student loans authorized under Section 435(i),Title IV of the Higher Education Act occurs on an FFEL loan after 27 to33 days, depending on the loan repayment schedule, and over the course ofthe 199 s, the federal government has become more aggressive aboutcollecting student-loan repayments. (1985, August 19). Historically, collection agencies have made their money on apercentage of the amount recovered. Since wages are on the rise and unemployment is under 4 percent in many major U.S. Washington, D.C.: USGPO. Time, 126, 21. . . . X12 7. News & World Report. Outsourcing of student-loan collections, whichthe Department considers a "volume-driven" cost, is a significantinnovation for many reasons: . . The negative subsidy figures for direct loans, at net present value, reflect the FY2 federal budget surplus. ACA Press Release. Between 199 and 2 , the student loan default rate declined overall,from 22.4% to 8.8%, whereas between 1985 and 199 it had risen from 1 % to22.4% (Dunning, 1985). This research explores positive aspects of the collection ofdelinquent student loans in the USA. Sherrid, P. A professional collection contractor understands entitlement to talk with a debtor's neighbors or associates (in particular when skip-tracing) but will never discuss the debt with them or with the debtor's coworkers or employer (Collection, 1983). . of Education, 2 , p. In the case ofdelinquent federal student loans, however, the borrower is required to paythe full amount of the loan, plus the collection fees. In other words, it is difficult for the federal agencieswith student-loan responsibility to achieve real-world efficiencies in thecontext of changing economic factors (Dept. In thecollection industry, a student loan is considered delinquent if a paymenthas not been made in 31 days and in default if no payment has been made in18 days (Kaulkin, 1996). (1999, August 17). (2 , February 15). Do not be misled by the more or less rosy scenario for collectionsbased on the good health of the US economy. That state of affairs implies an operational outsourcing opportunityfor entities such as collection agencies, which are well suited to the taskof tracking financial records by means of technology-driven informationsystems designed for the purpose. (1998, May 28). U.S. Using professional collectors instead of agency personnel to satisfy loan defaults might decrease federal administrative costs on direct loans, which are greater than for FFEL loans. Retrieved from WorldWide Web 31 July 2 , at http://www.ed.gov/offices/OPE/DCS. Average cost of tuition is up 5% for 1997-98. Retrieved from the World Wide Web, 31July 2 , at http://www.collector.com/content/press/pr/1998/98 529.html. Even some smaller agencies have been extremelysuccessful, such as the Boston agency that in early 2 announced a 48%increase in student loan recoveries--$33.7 million in 1999 compared to$22.8 million in 1998. . Fees are regulated by law and typicallyrange from 25% to 3 % of the amount. Washington, D.C.: USGPO. In some cases (e.g., very small debts)the fees may be higher (Collection, 1983). A professional collection contractor will make a project of not impugning the character of a debtor via name-calling or by sending a (very public) collection notice via postcard or by emblazoning "COLLECTION" across the front of an envelope. (1995, October 6). Chronicle of Higher Education, 44, A49-55. cities, these people are likely to get a job in two weeks, sometimes before they walk out the door. Indeed, strong internal controls and a thoroughly professional attitude are in place in the best agencies; in-house collections at federal agencies would necessitate a major investment in training and ongoing monitoring of collectors' performance. What these facts are building is evidence of a market gap and a needfor increased loan-administration efficiencies in connection with student-loan defaults. An Atlanta-based ACA member explains: The typical person in debt is like you and me--a professional--who happens to get downsized and is unable to make payments. Federal student loan programs databook FY94-FY96. Department of Education. (Full-service collection agents do not just make phone calls to past-due accounts but instead continually monitor repayment schedules on behalf of clients--a function collection agencies are ideally positioned to perform.) . American Collectors Association. President signs bill repealing defensedepartment garnishment policy. Total federal programcosts for all student loans, whether direct or FFEL (loans made by theprivate sector but guaranteed by the federal government) also declined(U.S. Persons in default may be cut off from all manner of federal financial assistance. $13,664 at Four-year private schools . By the same token, borrowers' rights are more likely to be protected if a collection agency handles the process. The NPV in any given year is thereforea moving target. . U.S. High cost of college. The American Collectors Association (ACA) cites statisticsshowing the overall consumer-debt amounting to $6.3 trillion and points tocreditors' increasing outsourcing of collections on an "early out" basis.In some industries, accounts receivable get jobbed out for collection at 3 to 6 days as opposed to the more traditional 15 to 21 days. The positive subsidy figures (relating to default and interest subsidies paid by the government) for FFEL loans show that more than 1 % of a loan functions as a default contingency fee. According to Section 11 5 of The National Defense Authorization Act For Fiscal Year 1998, debtors, rather than creditors, to be charged for all costs associated with the processing of a garnishment (Saukko, 1997). While no law excuses a debtor from paying the bills, it cannot be stressed enough that consumers are protected in a variety of ways against what the government has determined are unfair methods of collecting those bill. $1,5 1 at Two-year public collegesWhat does that translate to in student loans? Department of Education. The collection industry has undergone some consolidation and increasedinstitutionalization in recent years, even though the range of serviceofferings has increased, partly because of agencies' increasedtechnological capabilities. A "collection contractor" understands the requirement to be truthful at all times, never implying that he or she is a lawyer if that is not true, never implying that the client is the credit bureau and not the government. of Education, 2 ). Debt collection serviceguide to defaulted loans. Maintenance fees include loan-related activities thatfollow the "origination" or granting of a loan, such as maintaining a loanrecord on Department of Education information systems, processingrepayments, bringing delinquent borrowers back into current status, andcollecting on defaulted loans. Public-private partnerships improve debtcollection. . . By comparison, only $15.2 million in FFEL repayments had beencollected by the government over the same period (U.S. 3). American Collectors Association PressRelease. $3,111 at Four-year public colleges . The costs of servicing student loan accounts, even without defaults,are significant. Retrieved from the World Wide Web 31 July 2 , athttp://www.collector.com/content/press/pr/1997/971121.html. . The continued growth and good health of the US economy bodes well forthe success rate of collection agencies involved in student-loan collectionefforts. (1999, October 5). . of Education, 1999). Nation's Cities Weekly, 21, 4-5. Skip-tracing, or tracking down debtors who change addresses frequently (Collection, 1983), has been totally revolutionized by on-line white pages. . Considerthe implications: . Department of Education. Retrieved from the World Wide Web, 31 July 2 ,at http://www.collector.com/content/press/pr/2 / 214.html. Karl, P.A. III. ACA Press Release. Retrieved from World Wide Web 31July 2 , at http://www.ed.gov/offices/OPE/PPI/DataBook94-6/no-frame/tab45.html. Gose, B. Collectors who are truly pros do not have to be reminded of that. 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