Many believe that the next great financial crisis in America involves the enormous size and volume of student loan debt being acquired by our nation’s young adults. In a recent Bloomberg article titled “The Lawsuit Machine Going After Student Debtors,” it is stated student loans have surpassed credit cards to become the second-largest source of outstanding debt in the United States, leaving them only after mortgages. In fact, since 2007 the federal student loan balance has more than doubled, to almost $1.2 trillion from $516 billion.
The current state of the job market in the United States is news to no one and recent college graduates are facing harsh employment realities while carrying the burden of what can seem like insurmountable debt. With these pressures come defaults followed by an increased flow of legal debt collection matters.
Firm Claim Practices
With student loan defaults on the rise, increased concern turns to the record keeping by the creditors. While student loans are generally written contracts which provide superior proofs at trial and in many states, a longer statute of limitations, it also can lead to documentation concerns. First, many student loans are deferred while the student attends graduate or professional school. Economic or medical circumstances, military or service as a teacher might forgive some of the debt or defer payment on it. As a result, payments may never have been made or appear to have been made so long ago the case appears out of statute. Your internal process may need to accommodate these circumstances. Evidence of a deferment and a payment history may be required for placement review on a file. Second, bankruptcy, in most cases, only puts the loan(s) in abeyance; it does not discharge them. As a result, your standard vendor scrubs that locate a bankruptcy will need to be tweaked and reviewed in light of this unique wrinkle in student loans. Third, issues of venue and guarantees challenge the firm to determine who should be sued and where, as a consumer might reside in Illinois but the parent co-borrower lives in another state. Finally, as certain original lenders pool loans into asset-based securities that are purchased by trusts who administer them throughout the life of the loan, including while the loan is in good standing, traditional notions of original creditor versus debt buyer have to be put aside when determining the proper party plaintiff.
Utilization of Collection Firms
Collecting on these accounts may be challenging. In most cases, the consumer is a young person having trouble finding work and his parents, nearing retirement who don’t have the resources available to pay these loans. Likewise, many are hard debts for many consumers to accept as in many cases these lingering loans are reminders of frustrated expectations and dreams. For that reason, it is important to assure you and your student loan clients have open communications on settlement parameters, including graduated payment plans that recognize the hopeful short term financial woes of the consumer but allows for potential positive changes going forward. I have found most students want to pay these loans but are just having trouble right now. As always, despite the negative press, debt collection law firms are well suited to be the conduit to help students get back on their feet. Contrary to what many publications say, we want to speak to these consumers to help resolve their student debt issues either prior to going to court or during the litigation process.
The Future
More and more emphasis will be placed on student loan collections by regulatory agencies. This is a natural progression given the CFPB and other agencies contend that one out of four student loan borrowers are in default. At this point, much of the discussion is directed to the servicers of these loans. However, given the recent activity of the CFPB in the area of legal debt collection, I am confident changes will be on the way.
In my mind this may not be a bad thing. However, this only addresses the tail end of the issues. We all know today’s cost of education is extraordinary and showing no signs of slowing down. Perhaps Congress, the CFPB and the Department of Education might be better tasked to determine why college costs so much and how to make it more affordable…even for the people who collect debt for a living!
Fred N. Blitt, Esq., is a partner with Blitt and Gaines, PC in Illinois and Couch, Conville and Blitt in Louisiana. He is past president of NARCA.