Debt Servicing versus Debt Collection
Debt servicing and debt collection are two different things. Debt servicing is the management of the debtor-creditor relationship from the time the loan is signed until the loan is paid off. Debt collection is the use of legal process to recover money owed on delinquent accounts. Traditionally, debt servicing is for loans that are not in default, and debt collection is for delinquent loans. However, career school payment plans are usually not serviced in the same manner as other private educational loans, which is why they perform 20% worse.
Comparison of Payment Plans and other Private Educational Loans
There are three primary reasons that career school Payment Plans underperform other private educational loans.
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PRIVATE EDUCATIONAL LOANS |
PAYMENT PLANS |
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| 1 | 3rd Party Servicer manages the debtor-creditor relationship. | 1 | School provides limited self-servicing. |
| 2 | Enforcement mechanism is credit reporting, default interest rates, legal process, and use of laws that make discharging the debt in bankruptcy difficult. Students have longer repayment Terms which lead to more manageable payments making default less likely. | 2 | Enforcement mechanism is to deny the student the right to graduate until the debt is paid off. The policy has major problems: (1) it causes a compliance problem in that students don’t meet SAP and graduation and placement rates suffer which creates accreditation and licensure issues; and (2) it reduces enrollment because the monthly payments are large and the payment Term is short. |
| 3 | Electronic records and compliant documentation make enforcement straight-forward. Automated process is far cheaper and less labor-intensive. | 3 | Paper records and loose documentation make enforcement difficult, create a compliance issue with record keeping, and make the process labor-intensive. |
Career Schools Have Difficulty Finding Debt Servicers
Most debt servicing companies do not target or, in many cases, accept career schools as clients because Payment Plans are viewed as a temporary way for schools to help students finance tuition since the ultimate goal of virtually all post-secondary schools is to qualify for Title IV. However, it takes an institution about 3 years after licensure before it can complete the accreditation and Title IV application processes and begin receiving Title IV payments. And there are hundreds of schools that operate without Title IV for 5 years, 10 years, or longer. These institutions and their owners are plagued by low collection rates during their pre-Title IV years and have large bad debt portfolios that sometimes never are serviced or collected even after the school receives Title IV or shuts down due to inadequate cash flow.
Why Debt Collection Fails
Help only arrives for the accounts once they have gone into default. Then, a debt collection agency or collection lawyer will make collection attempts on the defaulted loans. They’ll charge a high percentage, usually 40% plus costs. And they’ll still not be able to collect very much because the Payment Plans haven’t previously been serviced, the records are inadequate for enforcement, and/or the school has waited too long before placing the debt for collection so the statute of limitations has expired creating extra work and reducing the likelihood of recovery. As a last resort, a debt buyer comes along and purchases the loan portfolio for 3% of its face value, turning $500,000 of sales into a depressing $15,000 of cash flow.
There’s a Better Way
Payment Plans for new students should be serviced from the beginning using enforceable documentation, a positive debtor-creditor relationship, and tools that make repayment more beneficial to the debtor. For delinquent Payment Plans, it is important to take a step backward and service the debt before the formal legal process is instituted. Without the servicing work, the creditor may be expecting a payoff that never comes. Tweet
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