Nightmare scenario - you've been contacted by a debt collection service to pay off student debt.

But instead of leading you to a path of economic opportunity, they might actually be trying to keep you in debt.

The Federal government pays roughly $1 billion annually to debt collection agencies for services that aren’t all that effective at debt reduction.

The U.S. Department of Education doles out $1,710 to a debt collector every time a borrower advances out of debt. That process, known as rehabilitation, is meant to get borrowers up-to-speed on their student loans.

Once borrowers reach that milestone, they’re able to sign up for a repayment plan. Enrolling in a loan repayment plan is a necessary step for paying off student loans and it’s a step left un-taken by roughly 90 percent of borrowers, perpetuating the student debt crisis.

Most of the borrowers do go back into debt, having to start the debt rehabilitation process over again while the Education Department lines the collection agencies’ pockets.

According to an analysis by the Consumer Financial Protection Bureau, roughly fifty percent of those who enter the rehabilitation process default on their loans for a second time within just three years. These rehabilitated loans are not included in the Education Department’s grading system of debt collectors and therefore fly under the radar of accountability.

The Trump Administration is trying to change that.

Education Department Secretary Betsy DeVos recently suggested that the administration may scrap the current system and establish something new. DeVos has pledged to reform other areas of America’s education system, such as supporting school choice and charter schools for K-12 education. These stances and others played into her controversial appointment.

But greater than the politics surrounding DeVos is the higher education bubble itself, an issue the Secretary wants to tackle through reforming the student loan collection problem.

Guaranteed Federal student loans have only resulted in increased tuition. Colleges and universities can depend on funding from the government and such a financial environment stifles competition.

In other words, guaranteed student loans not only played a direct role in tuition price inflation, but they also contributed to the decreased quality of education. Many individuals who are in student loan debt graduated with degrees that hold little worth, and now they’re direct targets for government subsidized debt collection groups.

 

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