Collection Fees

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The collector payment system is structured so that the contractors keep a portion of the money they collect. Collection contractors charge the Department of Education (“the Department”) a contingent fee for any payments made by the borrower on a loan placed with the contractor by the Department. The Department passes these costs to borrowers to the extent allowed by law. Because the Department applies borrower payments first to defray collection costs, the outstanding balance owed on the loans it holds consists almost exclusively of unpaid principal and accrued interest.

In addition to “special” incentives for good performance, the collector receives a commission on a payment as long as the collector has been assigned the file, whether or not the borrower’s payment was instigated by that collector’s actions. The Department then deducts an amount roughly equal to the commission it has paid its collector from the borrower’s payment. Only the amount left over after the commission is paid is applied to interest and then principal, in that order.

The collector cannot assess an amount in advance for collection fees but must instead apportion a percentage of each payment toward collection fees. In an effort to prevent up-front loading of collection costs, the Department has clarified that the borrower is not legally obligated to pay costs that have not been incurred. The Department has recognized that the practice of loading fees up-front can actually discourage repayment and in any case does not reflect actual costs.

(Consider the following example. Assume a borrower’s current obligation on a loan, including principal and interest, is $10,000 and that the commission paid to collectors is 30% of the amount collected. Even if the borrower immediately pays the full $10,000, the Department will first apply the funds to pay the collection commission, leaving only $7000 to apply to the outstanding balance. The borrower’s obligation is thus not paid off but only lowered to $3000. To pay off the $10,000 balance, the borrower must immediately pay $14,285.71. The Department will apply 30% of that amount (30% of $14,285.71 is $4285.71) to collection costs. The remainder ($10,000) pays off the loan.)

Example: Paying the amount due.

Balance = 10,000

Payment = -10,000

Breakdown of Application of Payment

Applied to Collection fees (10,000 x 30%) = 3000

Applied to Balance = 7000

Remaining Balance = 3000

Example: Amount required to pay off loan.

Balance = 10,000

Payment = -14,285.71

Breakdown of Application of Payment

Applied to Collection fees (14,285.71 x 30%) = 4285.71

Applied to Balance = 10,000

Remaining Balance = 0

Collection costs should be recalculated each year after a loan goes into default. As to each loan in default, the amount of the previous year’s collection costs should be removed from the balance of the loan and the newly calculated rate should be applied. Rates should also be recalculated each time the loan is transferred from one entity to another.

The Department will show projected collection agency fees on the total balance of the account if the account is assigned to a collection agency. However, fees are actually earned and charged only if the borrower makes payments.

The Department’s regulations require guaranty agencies to charge collection fees, whether or not provided for in the borrower’s promissory note. The method of allocating students’ payments to the fees must be the same as for Department-held loans.