The debt collector on the other end of the phone gave Oswaldo Campos an ultimatum:
Pay $219 a month toward his more than $20,000 in defaulted student loans (, or Pioneer Credit Recovery, a contractor with the U.S. Education Department, would confiscate his pay. Campos, disabled from liver disease, makes about $20,000 a year.
Were not playing here, Campos recalled the collector telling him in December. Youre dealing with the federal government. You have no other options.
Campos agreed to have the money deducted each month from his bank account, even though federal student-loan rules would let him pay less and become eligible for a plan -- approved by Congress and touted by President Barack Obama ( -- requiring him to lay out about $50 a month. To satisfy Pioneer, Campos borrowed from friends, cut meat from his diet and stopped buying gas to drive his 82-year-old mother to doctors visits for her Parkinsons Disease.
With $67 billion of student loans in default, the Education Department is turning to an army of private debt-collection companies to put the squeeze on borrowers. Working on commissions that totaled about $1 billion last year, these government contractors face growing complaints that they are violating federal laws by insisting on stiff payments, even when borrowers incomes make them eligible for leniency.
Boiler Room
Education Department contracts -- featuring commissions of as much as 20 percent of recoveries -- encourage collectors to insist on high payments. Former debt collectors said they worked in a boiler-room environment, where they could earn bonuses of thousands of dollars a month, restaurant gift cards and even trips to foreign resorts if they collected enough from borrowers.
In failing health, after contracting hepatitis from a blood transfusion, Campos pleaded with Pioneer, owned by SLM Corp. (SLM) (US), the nations largest student-loan company better known as Sallie Mae.
He left a $40,000-a-year job at the Massachusetts health department when he got too sick to work and waited for a liver transplant (. The 52-year-old former busboy, a naturalized U.S. citizen from El Salvador (, earned bachelors and masters degrees in the 1990s from Cambridge College in Massachusetts.
I know I owe this money and I want to pay it back -- I just cant, Campos said, his eyes filled with tears, during an interview at the Boston social-services agency where he works six hours a week leading court-ordered classes for drunk drivers.
181,000 Complaints
Debt collectors are the subject of more complaints to the Federal Trade Commission than any other industry -- almost 181,000 last year. Within the past 17 months, three companies working for the Education Department -- including one that is majority owned by JPMorgan Chase & Co. (JPM) (US)s private-equity arm -- settled federal or state allegations of abusive debt collections. The companies didnt acknowledge wrongdoing, and Chase declined to comment.
The Education Department said the government investigations didnt involve the companies work for the agency.
The U.S. Consumer Financial Protection Bureau, created in 2010 in the wake of the credit crisis, has proposed supervising the largest debt collectors to ensure they are complying with laws such as the Fair Debt Collection Practices Act. About 5 million federal education-loan borrowers are in default, generally meaning they have failed to make payments for 270 days or more.
With student-loan defaults rising, we want to make sure borrowers clearly understand their loan-repayment options and debt collectors are following the law, Rohit Chopra, the agencys student-loan ombudsman, said in an e-mail.
Reasonable and Affordable
Federal-aid law requires collectors to offer reasonable and affordable payments, so debtors can rehabilitate their loans, repairing their credit (IND) and making good on what they owe taxpayers.
The law mandates no minimum payment for a borrower to enter a rehabilitation program, and collection companies may take borrowers finances into account. The fair debt act forbids …