This research explores positive aspects of the collection of delinquent student loans in the USA. The research will set forth the context in which delinquent-loan collection has emerged and the scope of the delinquency problem and then discuss the financial benefits of a well-managed collection project.
In fiscal year 1995, the U.S. Department of Education held about $8.5 billion in delinquent federally guaranteed student loans (Dockter, 1998, p. 4). In fiscal 1996, the federal government paid to private-sector lenders $2.662 million in loan-default guarantees on Federal Family Education Loans (FFEL), a 16% increase from the previous year, bringing the 10-year cumulative total of student loan defaults, or receivables, to about $28.9 million. By comparison, only $15.2 million in FFEL repayments had been collected by the government over the same period (U.S. Department of Education, 1996).
Between 1990 and 2000, the student loan default rate declined overall, from 22.4% to 8.8%, whereas between 1985 and 1990 it had risen from 10% to 22.4% (Dunning, 1985). In FY1999 alone, the Department of Education collected $2.2 billion in defaulted loans, consolidating another $860 million in defaults in order to reschedule debt. Total federal program costs for all student loans, whether direct or FFEL (loans made by the private sector but guaranteed by the federal government) also declined (U.S. Department of Education, 2000).
While that sounds like good news and sound financial management, it conceals the fact that the Credit Reform Act of 1990 mandates calculations of the net present value of administrative costs as well as federal "subsidies" over the life of a loan. The NPV in any given year is therefore a moving target. Consider current fiscal-year student-loan defaults reflected in subsidy figures:
Note: Estimates reflect net present value of lifetime costs for loans made in FY2000 (Dept. of Education, 2000, p. 1).
This chart ill...