Government Pays Debt Collectors $40 For Each $1 They Retrieve

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Robert Donachie Capitol Hill and Health Care Reporter
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The U.S. government pays professional debt collecting agencies, on average, nearly 40 times the value of what they collect, according to joint research released Tuesday from the Consumer Financial Protections Bureau and government filings.

The federal government is annually dolling out an average of $1 billion to debt collectors to retrieve borrowers delinquent debt, Bloomberg reports. Of course, it is American taxpayers, not the government, that are shouldering this hefty sum.

Currently, the government is particularly interested in retrieving outstanding student loan debt. Student loans are one of the most common and largest forms of borrowing in recent years, as families still hold to the belief that a college education is necessary for achieving the “American Dream.” The total value of outstanding student loans eclipses $1.3 trillion in 2017.

Nearly 8 million Americans holding some $137 billion in federal student loans are at least 360 days delinquent on their payments. That figure is roughly equivalent to the number of people who lost their homes after the housing market collapse of 2007, according to The National Center for Policy Analysis. Another 3 million owing $88 billion are over a month late on their payments. (RELATED: $137 Billion Of Student Loans Are Delinquent)

The problem is unlikely to improve anytime soon, as the majority of those who default on student loans are among those with weak credit, according to new research by economists at The Federal Reserve Bank.

Debt collectors rack in up to $1,710 from the U.S. Department of Education every time a debtor makes good on their debt through a process known as rehabilitation, but the designation of good standing can be rather dubious.

For a debtor to be considered in good standing under the government’s rehabilitation program, a borrower must make nine on-time payments of as little as $5 over the course of 10 months. Effectively, a borrower must cough up $45 over the course of 10 months. Even more troubling is the fact that over 40 percent of borrowers that go through reconciliation default again within three years, the Consumer Financial Protection Bureau reports.

The department has allocated $4.2 billion to debt collectors since 2013 alone.

Collectors reportedly keep pressure on the department to continue the program because the contracts provide them with such a lucrative opportunity. Other clients do not have the guaranteed financial backing of the federal government.

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