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Student-loan debt-collection agencies garner criticism

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Joshua Mandelman made $454,000 in a single year as a student-loan debt collector — more than twice the pay of the U.S. secretary of education.

His boss, Richard Boyle, CEO of Educational Credit Management Corp., received $1.1 million in 2010, including commuting expenses from his ranch in New Mexico to EMC's headquarters and to offices in Indianapolis and Sacramento. Five other ECMC managers each took home more than $400,000.

ECMC, a Minnesota-based not-for-profit group, owes its success to an 18-year-old agreement with the U.S. government. The company charges fees to borrowers and earns commissions from taxpayers — totaling as much as 31 percent — when it collects on defaulted student loans. Those rich rewards, which are approved by Congress, are sparking criticism that ECMC and similar collection agencies are reaping a bonanza from former students’ pain.

Among those is Indianapolis-based United Student Aid Funds Inc., the largest guaranty agency, better known as USA Funds.

The federal loan program “is enriching collection agencies and undermining a goal we all want for society — to encourage people to go to college,” Robert Shireman, a former deputy undersecretary of education under President Barack Obama, said.

ECMC and USA Funds are two of 32 little-known “guaranty agencies” that play a key role in the world of higher-education finance. They oversee student loans for the U.S. Education Department, which began its lending program in 1965. The groups guarantee loans made by banks and other private lenders. They promise to repay the lenders if borrowers don’t. If the agencies can’t recover the money, the federal government takes over the loan, shifting the risk to taxpayers.

ECMC says it helps keep federal financial-aid programs solvent by recovering taxpayer money. Since its founding in 1994, the company has returned $4.3 billion to the U.S. Treasury, said Dave Hawn, ECMC’s chief operating officer.

USA Funds says it prevented nearly $26.5 billion in defaults on 1.6 million past-due federal student loans in its most recent fiscal year. The team has more than 200 full-time employees who work with borrowers who are behind on payments.

ECMC’s collectors steer borrowers into affordable payment plans, repairing their credit and turning their lives around, Hawn said The firm also funds more than $20 million a year in college scholarships for low-income students and runs financial-literacy and higher-education counseling programs.

“I’m really proud of what we do as an organization,” Hawn said.

ECMC’s debt collectors earn bonuses as a reward for extracting money from defaulted borrowers. In 2010, the bonuses for top performers amounted to as much as 10 times their base salaries, which ranged from about $33,000 to $46,000, according to the company’s tax return.

Mandelman’s $454,000 was more than double his pay in 2006, making him ECMC’s highest-paid collector, tax records show. Four other debt collectors took home between $301,000 and $389,000 in 2010.

In an interview outside his home in Minneapolis, Mandelman, 32, said he works 12-hour days helping borrowers get their finances back on track. Thank-you notes cover his desk, he said.

“I did well,” said Mandelman, part-owner of the Amsterdam Bar and Hall, a restaurant and nightclub in nearby St. Paul. “I worked hard. I also helped a lot of people.”

U.S. higher-education debt is sounding alarms in Washington, D.C., as defaults more than doubled since 2003, to $67 billion. Congress is debating whether to halt the doubling of interest rates on some student loans in July. With college costs soaring, outstanding student loans have spiraled over $1 trillion, surpassing credit-card debt.

In March, the Obama administration proposed changing how it regulates the student-loan debt collectors it hires, amid complaints they insist on stiff payments, even when borrowers’ incomes make them eligible for leniency.

The Education Department declined to discuss compensation at ECMC, referring questions to the company.

“We don’t think anyone working on our behalf should put personal profit ahead of serving the best interests of students,” Justin Hamilton, a department spokesman, said in an e-mail. “Much of the loan-collection work carried out by guaranty agencies is defined by congressional statute. Some of those policies deserve a second look and we welcome a conversation with Congress about how they can help us with that.”

As ECMC’S debt collectors have prospered, so has Boyle, the CEO.

Boyle — a former executive with SLM Corp., the largest U.S. student-loan company, known as Sallie Mae — received $271,000 in 2002. His compensation rose to $618,000 in 2004, $852,000 in 2008 and $1.1 million in 2010, making him the highest-paid head of a guaranty agency.

Carl Dalstrom, the CEO of USA Funds, got $775,000 in 2010.

As part of Boyle’s compensation, ECMC pays for his commuting expenses and then reimburses him for the taxes he owes on those expenses, a payment known as a “tax gross up,” according to the company’s tax filing. Besides salary and bonus, his pay includes deferred compensation and benefits.

Boyle lives on a 715-acre ranch in Youngsville, N.M., with 26 head of cattle, property records show.

The 64-year-old CEO makes two or three trips a month to ECMC’s headquarters in Oakdale, Minn., near St. Paul, Hawn said. Boyle, who declined to be interviewed, also travels to ECMC offices in Sacramento and Indianapolis, Hawn said.

Boyle flies coach on commercial flights when commuting, Hawn said. Until recently, Boyle stayed in an apartment paid for by the company. He now stays in hotels, Hawn said.

Only “a small number” of ECMC’s 90 debt collectors received pay in the $300,000 to $400,000 range, Hawn said. On average, they earn about $77,000 a year, he said.

ECMC itself decided that debt-collector bonuses were excessive. Last year, the company changed its incentive policy, making it difficult for collectors to earn more than $150,000 a year. ECMC took action to “get our compensation for that team in line with the market,” Hawn said.

The company stands by its executive pay. Rising management compensation reflects ECMC’s growth, said Hawn, who received $541,000 in 2010.

Since Boyle became CEO in 1999, revenue tripled, to $168 million, as the company took over the portfolios of guaranty agencies in Oregon, Connecticut and California. Under the company’s charter, the Education Department turns to ECMC as the go-to organization to take charge of troubled agencies.

Boyle also used excess revenue to buy related businesses that aren’t tax-exempt, including Premiere Credit of North America LLC, which chases patients for medical bills and parents for child support, as well as students for loan payments.

When setting executive pay, ECMC directors consider compensation inside and outside the charitable world, Hawn said. Under IRS rules, not-for-profit companies must demonstrate they aren’t paying their employees excessively. ECMC directors hire independent compensation consultants to ensure they are in compliance, he said. Fees paid to company directors have about tripled during Boyle’s tenure, to as much as $90,000 a year.

The company benefits financially from federal student-loan collectors’ powers under U.S. law. Unlike those chasing credit-card borrowers, student-loan collectors can confiscate wages without a court order and seize tax refunds and Social Security checks. There is no statute of limitation on collecting student loans, which are rarely discharged through bankruptcy.

In February, an ECMC debt collector phoned Susan Raposa, a 61-year-old special-education teacher, telling her to pay or face wage garnishment, Raposa said. ECMC now seizes $600 a month on behalf of the federal government — keeping $96 — or 16 percent — as its fee.

As a single mother, Raposa said she struggled to pay off her student-loan balance — now $47,000 — since she graduated from Bridgewater State College in Massachusetts in 1992.

“I absolutely want to pay my fair share,” said Raposa, who lives in Raynham, Mass., about 35 miles south of Boston. “But I’m going to live poorer than people on welfare.”

ECMC won’t discuss borrowers because of consumer confidentiality, Hawn said.

Like all guaranty agencies, ECMC receives more money collecting from borrowers like Raposa than it does keeping them from defaulting in the first place.

Agencies get 1 percent of a borrower’s loan amount for preventing a default through counseling. That’s $250 on a $25,000 loan, the current average of a student leaving college, according to the Education Department.

Once borrowers default, or fail to make payments for 270 days or more, the financial rewards for collectors multiply.

Under government rules, guaranty agencies add collection costs — currently as much as 25 percent — to a borrower’s loan balance. They also keep 16 percent of any money recovered.

If an agency “rehabilitates” a loan — getting borrowers to make nine payments in 10 months — it gets a jackpot.

By law, the organizations can receive as much as 37 percent of a borrower’s entire loan amount, half in collection costs and half in taxpayer-funded commissions. ECMC says it typically collects 31 percent, or $7,750 on a $25,000 loan. That’s 31 times what it can make for preventing the default through counseling.

In 2010, ECMC generated $131 million from collections, or about three quarters of its revenue, compared with about $17 million from programs aimed at preventing default.

In terms of caseload, ECMC devotes more employees to default prevention than collections, Hawn said. The company averages 77 default-prevention workers for 241,000 delinquent borrowers in need of counseling. It has about 90 debt collectors for 557,000 borrowers in default.

Guaranty agencies now rely even more on collections after the Obama administration in 2010 stopped private lenders from offering federal student loans. The Education Department has since issued all new loans directly — cutting out a major source of fees for guaranty agencies.

Last year, Education Secretary Arne Duncan, whose annual salary is just under $200,000, asked the guaranty agencies to choose either debt collection or default prevention. He cited “poorly aligned incentives” because agencies make so much more money collecting on defaults.

The request was voluntary, and two dozen agencies submitted proposals. ECMC wasn’t one of them.

American Student Assistance, a guaranty agency in Boston, proposed getting paid based on the loans it keeps current.

“You shouldn’t profit from defaulted borrowers” as a public-service organization, said Paul Combe, who received $364,300 in 2010 as CEO of the agency.

The National Council of Higher Education Loan Programs, which represents guaranty agencies, says the organizations prevented 88 percent of seriously delinquent loans from defaulting in 2009, the most recent year for which data is available.

“There’s no factual basis for this claim that the incentives are misaligned,” Shelly Repp, president of the Washington, D.C.-based council, said, referring to Duncan’s comments.

Off a highway interchange in Oakdale, ECMC operates from a two-story brick building in an office park across from a Target store and McDonald’s restaurant. There is no sign out front, or in the reception area.

Debt collectors work in a “cubicle farm” in a one-story building attached to the main office, according to Shane Kussatz, ECMC’s former director of collections support. There, supervisors would hang pinatas over top producers’ desks, while automatic dialers and other computer systems helped the company track down more borrowers, he said.

“There was a lot of talk about operating as a nonprofit company,” said Kussatz, who took a buyout in January after 12 years at the company. “At the end of the day, our job was to collect debt. I didn’t fool myself.”

ECMC emphasized collections, according to Paul Fiedler, who worked as a default-prevention counselor from 2004 through 2009 in Richmond, Va.

The company asked counselors to call as many as 500 borrowers a month to get them back on track with their payments, said Fiedler. Under the federal program, he could let borrowers defer payments or temporarily reduce outlays because of a job loss or other hardship.

During Fiedler’s night shifts, counselors were expected to stay at their desks, except for bathroom breaks, said Fielder, 67. He left ECMC after it shut down the Richmond office.

“It was an endless job,” Fiedler said. “I don’t know why they didn’t hire more people. A lot of borrowers fell through the cracks. There were not enough hours in the day to get to them.”

Including monthly bonuses tied to his record of preventing defaults, Fiedler earned in the mid-$40,000-a-year range, he said. ECMC’s Hawn said collectors make more than counselors because recovering money from borrowers is “significantly more challenging.”

Default-prevention counselors clamored for the rare openings in debt-collection, Fiedler said.

“Everyone knew that’s where the big money was,” Fiedler said.

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  • Debt is a Two Way Street
    Those who will defend the student loan collection practices are either working in the industry or working for an elected representative. The collection methods border on the tactics used by a Chicago mobster. Collection fees are added at will by USA Funds and Sallie Mae. The fees are not defined in any agreement document. They are free to add any amount they please. The note that states "reasonable collection fees" is not valid due to this flaw but they collect them anyway. It is the FUD effect. The entire industry defies the U.S. Constitution and state constitutions. The entire industry is staffed by outlaws. Anyone that defends them is an idiot. They do not understand the reality of the student loan industry. There is no statute of limitations on student loans. Three crimes do not have a statute of limitations. Murder, rape and treason. How can one imagine a student loan as a crime that rises to the level of these three. It is virtually impossible to discharge a student loan through bankruptcy. The borrower must literally be on their death bed but must prove that in bankruptcy court, at great expense. The industry will illegally offset or garnish any income a borrower may have. They do this without the benefit of a court order. The borrower has no defense against this. The Constitution provides protection from this and some courts have agreed with these protections. Ask three people working in the industry the same question and you will get upwards of six answers. Try to talk to a supervisor and you will be told there are none available. They will leave a message asking a supervisor to call you but no call will come. They will tell you that something can not be done even while their own web sites state differently. A student loan is a life time of payments. If you are in default the balance will continually increase even though some kind of substantial payment is being made. Student loans are a scam. I tell anyone who is considering one to steal the money before taking a student loan. Those who have student loans already have my deepest sympathy.
  • IS IT REALLY OBVIOUS?
    How can an agency prevent the inevidable? If you let your loans go into default you are not responsible. This is what DEFERMENTS are for. Why wait until debt collectors call on them to start asking about Postponing payments. If there are medical issues or sick children involved you still had some time out of some day to pick up a phone and simply asks for a hardship forbearance or deferment. Excuses, excuses. How dare you borrow money and not pay it back, as promised, then get mad because they take it from you via wage garnishments and tax offsets. Think about it. Is it okay for someone to borrow money from you with no intentions on repaying.
  • who can help?
    if htese agencies come after you and want 67K and you earn 35K and have issues & medical expenses with special needs child- who can help? does the "target" have any recourse?
  • No Incentive to Promote Default
    If an organization prevents $26.5 billion in defaults and collects $1.3 billion from defaulted borrowers each year, how does that demonstrate an incentive to let loans go into default? Plus, prior to the Great Recesssion, the national student default rate had been cut from over 20 percent to less than 5 percent. See http://www2.ed.gov/offices/OSFAP/defaultmanagement/defaultrates.html. How's that square with your theory on student loan default?
  • Great article and research
    Whether you should go to college, borrow etc, is a difference topic. This is a fascinating article on the inner workings of the student loan collection business. The key point is how much should the federal government be paying for collections. It is obvious that the incentive is to let loans go into default and then collect them instead of preventing default. You can be fairly certain that any agreement put into place 18 years ago is obsolete. These firms have figured out how to benefit from an old system during a time when people are distressed.
    • Easy for you to say...
      Sorry, but I don't agree -society claims the only way to a decent job is through education, and now that they are graduating, there are no jobs!! I supported my kids in higher ed, and YES, I am paying for it for the rest of my working days, I'm sure...was it worth it? 2 of my 3 children have graduated college w/degrees -both are now in Union jobs, and the "right to work" vote, will probably soon make them unemployed!
    • Ant & The Grasshopper
      Just like everything else that's gotten people into trouble - they live beyond their means. Someone always has to pay. Don't buy a house if you can't afford the mortgage and all that goes with it and don't borrow to go to college. Don't put things on credit cards if you don't have the money in the bank. It all boils down the the same thing. There wouldn't be greedy loan sharks and collection agencies if people just bought only what they could afford.
    • Greed
      Greed, lies and mismanagemnt on both the borrowers and lenders. College is over-valued. The loans were sold like the bad mortgages were in the late 90's early '00. Don't take a loan out for school. Got to a local college and work to pay for it. Cash is king. Don't borrow from any bank... Cash rules everything... Get the Dave Ramsey Financial Peace University Seminar. Don't give your wealth away to credit cards, banks and lenders.

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