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A $144,000 Student Default Shows Who Profits At Government Expense

Sofia made payments when she could. She got forbearance from the debt-servicing company assigned to her case after contracting a bacterial illness she said was related to Hurricane Katrina, and later when she was helping support her ailing parents. That allowed her to defer payments. Meanwhile, interest charges kept piling up.

Student-debt servicers process monthly payments and act as the main point of contact for borrowers, similar to mortgage servicers. The Education Department awarded servicing companies $576 million in fees in the most recent fiscal year, according to the Federal Procurement Data System, which tracks what the government makes available to contractors, not what they're actually paid. Firms typically earn monthly fees by loan status: $2.85 for those in repayment, $1.05 when borrowers are in school and 45 cents when they're delinquent 361 days or more.

ACS, the Xerox unit, and Navient have serviced Sofia's debt. Navient disclosed in August that the CFPB, created under the Dodd-Frank Act to increase oversight of consumer financial products, may pursue an enforcement action involving its practices.

The agency said this year that loan servicing can lead to "hurdles for distressed borrowers" and sometimes push them into short-term fixes rather than long-term payment-reduction programs. Navient said in the filing that its practices "are lawful and meet industry standards."

The Education Department is reviewing performance standards for loan servicers before rebidding its contracts next year and plans to introduce a single loan portal for all borrowers, said Horn, the agency spokeswoman.

Sofia defaulted on her debt in 2007, according to her loan documents. After getting back on track, working as a waitress and repaying more than $20,000, she defaulted again and began hearing from FMS last year.

FMS's parent, Ceannate, is one of about two dozen collection firms paid a total of $963 million in the fiscal year that ended in September, according to the Education Department. That's down from a record $1.1 billion the previous year.

The Education Department is bidding out a new contract, the largest ever, as the volume of defaulted federal loans reaches an all-time high and fees have tripled over the past decade. In July, the agency changed to a fixed fee for rehabilitated loans from a percentage of what was collected.

Collection companies helped recover about $9 billion on more than 1.5 million loans from 2011 to 2013, according to a 2014 Government Accountability Office report.

"Everyone who touches the system performs a different role that adds value to the student," said Balaji "Raj" Rajan, chief executive officer of Rolling Meadows, Illinois-based Ceannate. "It's a complex process, and the system would work better if there was more stability. It's very hard on a program this vast to serve every single borrower without a single failure."

In February, Ceannate named former Education Secretary Margaret Spellings to head an advisory board to provide policy direction. A former department general counsel also sits on the panel, and a former default division director was hired in June as a top official in a unit that works with government contractors to minimize authentication errors. Spellings intends to resign her position before taking over in March as president of the University of North Carolina System, according to a school spokeswoman.

When private companies can't recover the money, as in Sofia's case, the Treasury Department garnishes Social Security, tax refunds or wages. Treasury said it had net offsets of $2.27 billion for education debts in fiscal 2015. It has garnished almost $20,000 from Sofia's tax refunds, she said.

Congress mandated that schools with default rates of 30 percent or higher for three consecutive years lose access to federal loans. Florida Coastal's default rate is 1.1 percent for the most recent year, well below the national average, according to federal data. Rates are measured by cohort for the year borrowers begin repayment.

Keeping default rates low has spurred a niche industry that provides such services to schools.

Corinthian Colleges Inc., the for-profit school that filed for bankruptcy in May in the largest shutdown in U.S. higher education, said it used outside firms and internal resources to reach borrowers for help "with alternatives to default," according to the company's 2011 annual report. The Education Department is now forgiving some loans. Last month, it canceled almost $28 million of debt for 1,300 former students at Heald College, one of Corinthian's three chains.

Borrowers can be swayed by calls from companies suggesting deferment or forbearance, which keeps default rates artificially low, according to Debbie Cochrane, research director at the Institute for College Access & Success, an advocacy group.

"That's not good for students, because it simply kicks the can down the road to default on an even higher balance later on," Cochrane said.

Sofia says she'd like to meet with someone to work out a repayment plan rather than field as many as 20 phone calls some days dunning her for money.

"I will pay it when I can," she said.

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