The higher education bubble will pop soon, predicts the wonderfully named David Swindle, who worked as a student loan debt collector and then a “default prevention” manager from December 2007 through July 2009. Collectors rarely collect money, Swindle writes.
Instead my job primarily entailed tracking down borrowers so they could put their loan back into forbearance or deferment so they would not default. Borrowers for loans dispersed between the early ’90s and the passage of Obamacare have a wealth of perks for those who are unable or uninterested in making payments. Lose your job? No biggie, you’re eligible for 2-3 years worth of unemployment deferment. Have a job that’s not paying you much? Chances are you’ll be eligible to use some of your 3 years’ worth of economic hardship deferment. Have other bills that you’d rather pay instead of your student loan? No problem, Sallie Mae and many other lenders offer sometimes as much as FIVE YEARS worth of forbearance time. Well, what happens if you’ve burned through all the time and still
wantneed time off from having to pay? Sallie Mae offered 3 years of Title IV administrative forbearance that had the same qualifications as the economic hardship deferment. Thus, as a collector I’d regularly come across borrowers who had gone YEARS without ever making a payment and the loan’s capitalized interest had just grown and grown and grown — much to the bank’s delight.
When all the deferment and forbearance deals run out and the borrower still doesn’t pay, it usually takes a year of delinquency to put a loan into default. As loan guarantor, the federal government reimburses the bank for almost everything owed. Then the loan is sold to a collection agency, which will add another 20 percent in fees.
. . . the borrower will often have the opportunity to “rehabilitate” the loan to bring it back into good standing. Usually they do this by making a year or so of auto-debited or at least consecutive payments. Then the loan returns, though much larger. But what also comes back? ALL of their deferment and forbearance options are reset back to zero because it’s basically a new loan. Then the whole cat-and-mouse process of putting off paying the loan, trying to hide from collectors and skiptracers, and letting the interest capitalize more and more can just start again.
The default rates don’t show the number of people who owe more and more on college loans, Swindle writes.