Government Profiting From Student Loan Defaults?

Published

January 14, 2011

Farnoosh Torabi is a nationally recognized author, expert and television host. Her first book, You're So Money, is an acclaimed tell-all for young adults searching for financial independence. Her new book Psych Yourself Rich, gives readers the mindset and discipline to build their financial life.

It’s a jaw-dropping claim, but one that Alan Collinge, founder of StudentLoanJustice.org, a consumer advocacy group, is confident is true.

The Wall Street Journal ran an interesting piece last week suggesting the federal government collects a hefty portion of defaulted student loans. But Collinge – who was quoted in the story – argues that it didn’t quite paint the real picture. “After paying the companies that actually collect the loans and other costs, the U.S. Department of Education expects to recover 85% of defaulted federal loan dollars based on current value,” says the WSJ, noting that the percentage of student loan collections are relatively huge compared to collections on other defaulted consumer credit. Banks, for example, might retrieve 10 cents for every dollar from past due credit cards.

But what the article doesn’t explain, Collinge tells me, is that the government is collecting 85% on hugely inflated loans. “The current value of the default portfolio includes principal plus interest at time of default, plus a tremendous amount of interest that accrued after default.”

And therein lies some possible profit and perhaps a serious, twisted incentive to offer students six-figure loans they will most likely never be able to repay. “Given a current defaulted loan portfolio of approximately $60 billion, the amount of revenue this represents to the Department of education is in the tens of billions of dollars,” writes Collinge in his self-published report.