Your Late Fees, Their Millions

Can't pay your student loan on time? The fat cats at Sallie Mae are so glad to hear it.

Collinge's most powerful ammunition is the hundreds of testimonials he has collected from student loan borrowers in distress. He shared with me the stories of a dozen whose original balance has doubled, tripled, or quadrupled. Most of them are long sagas of unemployment, medical problems, missed payments, endless paperwork, defaults, delinquency, and miscommunication. Susen Gench of New York, for example, borrowed $59,000 starting in 1982, has never gone into default but has had deferments, and has made $41,000 in payments by her own accounting (Sallie Mae says $30,000). Total debt now? $53,000.

In a twist, Sofia Echegaray, a 30-year-old singer-songwriter living in Austin, got into trouble for overpaying on her $35,000 in loans. Last summer, she says, "I was working a contract job and worried I was going to get laid off. So I paid $450 ahead—about a month and a half of payments." Then she got a letter saying she was actually delinquent with $60 in late fees. The customer service representatives at Sallie Mae informed her that extra payments count toward the principal, but don't cover the interest or other charges, unless you pay a whole month in advance at once.

All debtors are vulnerable to compounding interest and confusing charges if they get behind on their payments. Under federal law, student loans are supposed to be easier on borrowers than other kinds of credit. Lenders must offer deferments and forbearance, both ways to safely postpone payment if you are unemployed or go back to school. Under the law, mandatory forbearance is granted if you can demonstrate that you earn the same as the poverty line for a family of two, $1,069 a month, or if your payments exceed 20 percent of your income. Above that level, forbearance is granted at the discretion of the lender. Student loan borrowers say that these concessions are hard to wrangle from lenders, and that monthly income can be hard to establish with today's shifting, temporary employment. Most importantly, because student lenders have the full power of the federal government behind them to collect on loans, and because the loans are not dischargeable in bankruptcy, lenders are less likely to agree to a settlement below the full amount they say is owed. The charges can include late fees, penalties, interest added to the principal, and the costs of collection and litigation.

"I've made repeated offers to repay what I borrowed plus interest," says Collinge. "I begged, I pleaded. They say, no no no. You're going to pay that plus penalties, plus fees, plus the interest on these fees." The Department of Education has seized Collinge's tax refunds and is threatening to garnishee his wages. He can't find work in his chosen field because his credit rating is so poor. He can't get a credit card or a regular mortgage to buy his house. "I had to put $20,000 down on it. I got a private loan at 14 percent interest. The house was only $70,000, a total piece of crap."

Tom Joyce, a spokesperson for Sallie Mae, points out that student loan default rates remain at a record low of 4.5 percent, down from 22 percent in the early 1990s. He reviewed the data of two student loan borrowers from Collinge's site who asked to remain anonymous, but who had similar stories of large increases in balances. "I can attest that all of the actions taken on both accounts were in strict accordance with the rules set by Congress," he says.

Although Joyce talks about "borrower-friendly tools" and "default prevention," Sallie Mae has bet that extra fees from delinquent accounts will be a growing source of revenue. According to its 2004 annual report, these "debt-management revenues" increased more than 30 percent, more than any other cash stream. "We've been growing on the collections side for some time now," says Joyce. In 2004, the company purchased a majority interest in Arrow Financial Services, a major player in the collections business. The company purchases debts that have already been written off for pennies on the dollar— credit card debts, auto loans, utility bills, as well as student loans—and pursues the borrowers for a settlement through telemarketer- style phone farms. Last year, the state of Minnesota assessed a state record fine of $125,000 to Arrow for 15 violations, including an unauthorized bank withdrawal, harassing calls to debtors' employers, and attempting to employ a felon as a collector.

Arrow's website entices universities to turn over their receivables: "We understand that your institution's reputation remains linked with the loan, so we take extra care when dealing with your current and former students." When it comes to student loans, Arrow has little incentive to back down. In December, yet another federal circuit court reiterated that student loans are not dischargeable in bankruptcy, and the Supreme Court ruled in another decision that Social Security payments can be seized to pay the government back.

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