InsideArm.com has posted an article that discusses how private student loan companies have been very inefficiently collecting debt payments. Just a few years ago, debt losses in the form of student loans were extremely low because of benign credit conditions, strict underwriting, and the existence of guarantees for the loans.
Back then, traditional student loan collection practices — copied and pasted from check-the-box federal standards for collections practices — were a ticking time bomb, albeit with a very slow fuse. Deferments and forbearances could delay a loan from requiring a first payment for five years, and even longer in some cases. This meant the collection manager did not see the impending explosion of losses for some time.
Because of this, many companies weren’t in a rush to collect and some adopted a very laid back approach. But it caught up to them beginning in early 2007 and continuing into the middle of 2009 when the normal rate of delay of 120 days went up 7 times. This prompted some companies to step up their debt collecting by more frequent calling and other methods to more readily pursue payment.
But old habits die hard and many firms are still way behind, using anachronistic collections practices based on the federal check-the-box standards. This means as few as four attempts per month at borrower contact in Buckets 2 and beyond. Credit card portfolios with similar loss expectations of 3-5% annually are making more attempts than that per day! Many also still use ineffective letters, don’t measure the effectiveness of segmented strategies (or try new ones), and don’t monitor their agencies for performance. One issuer was surprised to find that their agency, which was paid by the hour with no incentive for cures, had set up a dialing strategy to minimize the likelihood of making contact in order to reduce their own expenses. They did this by setting the dialer to redial an account right after it received a no-answer.
Debt buyers stand to make a large profit from this. Since several loans are defaulting every month and are not being collected on by the original loaner, it’s hard for a debt buyer to pass up since it’s the money is just “sitting there to be scooped up.” If they were to find a student loan pool that hadn’t been touched in several years, a debt buyer could make quite a profit. Sales of defaulted student loans have been rare in the past but it has been gaining popularity and there is little to no competition in the market yet.
If you have had problems with debt collectors, or have been harassed by one, and have questions or concerns, feel free to contact us through our website or by calling 205-879-2447.
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