Debt Collection Services Providers are providing more and more debt recovery for student loan defaults. As an asset class, student loans represent the second largest consumer credit market next to mortgages.

As education costs continue to rise in the U.S., the number of defaults will certainly follow. With a current outstanding balance of more than $1 trillion, and shrinking credit card defaults, the student loan debt collection services market will continue grow as a major part of the ARM industry.

Government Contractors

Department of Education debt collection services contracts are becoming one of the most highly sought-after contracts within the ARM industry. Last year, the federal government paid out over $1.4 billion to 23 private debt collection services providers.

Unlike private lenders, the federal government has endless tools for collection that it can extend to debt collection services providers. If a debt collection services provider contracted by the government reaches a borrower who refuses to cooperate, the company can garnish wages or withhold a government check with the approval of the Department of Education.

As a result, debt collection services providers that are contracted by the government are able to recoup an astounding 80 cents for every dollar that goes into default. This is wildly successful compared to most private lenders that only recover about 20 cents on the dollar on defaulted credit cards.

Federal Student Loans and The Service Members Civil Relief Act (SCRA)

What is more interesting is that The Service Members Civil Relief Act, or SCRA, does not afford the same protections to military members with federal student loans that it does with other debt. Under the SCRA, a military member can cap the interest rate at 6% for all obligations entered into before beginning active duty if the military service materially affects his or her ability to meet the obligations. This can include interest rates on credit cards, mortgages, and even some student loans except for Federal guaranteed student loans.

Default rates have been increasing since 2007. The percentage of borrowers who defaulted on their federal student loans within two years of their first payment jumped to 9.1% in 2011, up from 8.8% the previous year, according to U.S. Department of Education data released Friday. A loan is declared in default by the Department of Education when it is delinquent for 360 days.

Borrowers are most often declared in default when they cannot be found. That is when the collection agencies take over. In the case of federal student loans, the government does not give up easily. If a debt collection services provider does not find a borrower in six months, the department simply turns the case over to another collection agency. At a time when credit card collection is diminishing and the unemployment rate has made collection challenging, many debt collection services providers have turned to collecting student loans as reliable alternative.

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