Student-loan debt-collection agencies garner criticism

Joshua Mandelman made $454,000 in a single year as a student-loan debt collector — more than twice the pay of the U.S. secretary of education.

His boss, Richard Boyle, CEO of Educational Credit Management Corp., received $1.1 million in 2010, including commuting expenses from his ranch in New Mexico to EMC's headquarters and to offices in Indianapolis and Sacramento. Five other ECMC managers each took home more than $400,000.

ECMC, a Minnesota-based not-for-profit group, owes its success to an 18-year-old agreement with the U.S. government. The company charges fees to borrowers and earns commissions from taxpayers — totaling as much as 31 percent — when it collects on defaulted student loans. Those rich rewards, which are approved by Congress, are sparking criticism that ECMC and similar collection agencies are reaping a bonanza from former students’ pain.

Among those is Indianapolis-based United Student Aid Funds Inc., the largest guaranty agency, better known as USA Funds.

The federal loan program “is enriching collection agencies and undermining a goal we all want for society — to encourage people to go to college,” Robert Shireman, a former deputy undersecretary of education under President Barack Obama, said.

ECMC and USA Funds are two of 32 little-known “guaranty agencies” that play a key role in the world of higher-education finance. They oversee student loans for the U.S. Education Department, which began its lending program in 1965. The groups guarantee loans made by banks and other private lenders. They promise to repay the lenders if borrowers don’t. If the agencies can’t recover the money, the federal government takes over the loan, shifting the risk to taxpayers.

ECMC says it helps keep federal financial-aid programs solvent by recovering taxpayer money. Since its founding in 1994, the company has returned $4.3 billion to the U.S. Treasury, said Dave Hawn, ECMC’s chief operating officer.

USA Funds says it prevented nearly $26.5 billion in defaults on 1.6 million past-due federal student loans in its most recent fiscal year. The team has more than 200 full-time employees who work with borrowers who are behind on payments.

ECMC’s collectors steer borrowers into affordable payment plans, repairing their credit and turning their lives around, Hawn said The firm also funds more than $20 million a year in college scholarships for low-income students and runs financial-literacy and higher-education counseling programs.

“I’m really proud of what we do as an organization,” Hawn said.

ECMC’s debt collectors earn bonuses as a reward for extracting money from defaulted borrowers. In 2010, the bonuses for top performers amounted to as much as 10 times their base salaries, which ranged from about $33,000 to $46,000, according to the company’s tax return.

Mandelman’s $454,000 was more than double his pay in 2006, making him ECMC’s highest-paid collector, tax records show. Four other debt collectors took home between $301,000 and $389,000 in 2010.

In an interview outside his home in Minneapolis, Mandelman, 32, said he works 12-hour days helping borrowers get their finances back on track. Thank-you notes cover his desk, he said.

“I did well,” said Mandelman, part-owner of the Amsterdam Bar and Hall, a restaurant and nightclub in nearby St. Paul. “I worked hard. I also helped a lot of people.”

U.S. higher-education debt is sounding alarms in Washington, D.C., as defaults more than doubled since 2003, to $67 billion. Congress is debating whether to halt the doubling of interest rates on some student loans in July. With college costs soaring, outstanding student loans have spiraled over $1 trillion, surpassing credit-card debt.

In March, the Obama administration proposed changing how it regulates the student-loan debt collectors it hires, amid complaints they insist on stiff payments, even when borrowers’ incomes make them eligible for leniency.

The Education Department declined to discuss compensation at ECMC, referring questions to the company.

“We don’t think anyone working on our behalf should put personal profit ahead of serving the best interests of students,” Justin Hamilton, a department spokesman, said in an e-mail. “Much of the loan-collection work carried out by guaranty agencies is defined by congressional statute. Some of those policies deserve a second look and we welcome a conversation with Congress about how they can help us with that.”

As ECMC’S debt collectors have prospered, so has Boyle, the CEO.

Boyle — a former executive with SLM Corp., the largest U.S. student-loan company, known as Sallie Mae — received $271,000 in 2002. His compensation rose to $618,000 in 2004, $852,000 in 2008 and $1.1 million in 2010, making him the highest-paid head of a guaranty agency.

Carl Dalstrom, the CEO of USA Funds, got $775,000 in 2010.

As part of Boyle’s compensation, ECMC pays for his commuting expenses and then reimburses him for the taxes he owes on those expenses, a payment known as a “tax gross up,” according to the company’s tax filing. Besides salary and bonus, his pay includes deferred compensation and benefits.

Boyle lives on a 715-acre ranch in Youngsville, N.M., with 26 head of cattle, property records show.

The 64-year-old CEO makes two or three trips a month to ECMC’s headquarters in Oakdale, Minn., near St. Paul, Hawn said. Boyle, who declined to be interviewed, also travels to ECMC offices in Sacramento and Indianapolis, Hawn said.

Boyle flies coach on commercial flights when commuting, Hawn said. Until recently, Boyle stayed in an apartment paid for by the company. He now stays in hotels, Hawn said.

Only “a small number” of ECMC’s 90 debt collectors received pay in the $300,000 to $400,000 range, Hawn said. On average, they earn about $77,000 a year, he said.

ECMC itself decided that debt-collector bonuses were excessive. Last year, the company changed its incentive policy, making it difficult for collectors to earn more than $150,000 a year. ECMC took action to “get our compensation for that team in line with the market,” Hawn said.

The company stands by its executive pay. Rising management compensation reflects ECMC’s growth, said Hawn, who received $541,000 in 2010.

Since Boyle became CEO in 1999, revenue tripled, to $168 million, as the company took over the portfolios of guaranty agencies in Oregon, Connecticut and California. Under the company’s charter, the Education Department turns to ECMC as the go-to organization to take charge of troubled agencies.

Boyle also used excess revenue to buy related businesses that aren’t tax-exempt, including Premiere Credit of North America LLC, which chases patients for medical bills and parents for child support, as well as students for loan payments.

When setting executive pay, ECMC directors consider compensation inside and outside the charitable world, Hawn said. Under IRS rules, not-for-profit companies must demonstrate they aren’t paying their employees excessively. ECMC directors hire independent compensation consultants to ensure they are in compliance, he said. Fees paid to company directors have about tripled during Boyle’s tenure, to as much as $90,000 a year.

The company benefits financially from federal student-loan collectors’ powers under U.S. law. Unlike those chasing credit-card borrowers, student-loan collectors can confiscate wages without a court order and seize tax refunds and Social Security checks. There is no statute of limitation on collecting student loans, which are rarely discharged through bankruptcy.

In February, an ECMC debt collector phoned Susan Raposa, a 61-year-old special-education teacher, telling her to pay or face wage garnishment, Raposa said. ECMC now seizes $600 a month on behalf of the federal government — keeping $96 — or 16 percent — as its fee.

As a single mother, Raposa said she struggled to pay off her student-loan balance — now $47,000 — since she graduated from Bridgewater State College in Massachusetts in 1992.

“I absolutely want to pay my fair share,” said Raposa, who lives in Raynham, Mass., about 35 miles south of Boston. “But I’m going to live poorer than people on welfare.”

ECMC won’t discuss borrowers because of consumer confidentiality, Hawn said.

Like all guaranty agencies, ECMC receives more money collecting from borrowers like Raposa than it does keeping them from defaulting in the first place.

Agencies get 1 percent of a borrower’s loan amount for preventing a default through counseling. That’s $250 on a $25,000 loan, the current average of a student leaving college, according to the Education Department.

Once borrowers default, or fail to make payments for 270 days or more, the financial rewards for collectors multiply.

Under government rules, guaranty agencies add collection costs — currently as much as 25 percent — to a borrower’s loan balance. They also keep 16 percent of any money recovered.

If an agency “rehabilitates” a loan — getting borrowers to make nine payments in 10 months — it gets a jackpot.

By law, the organizations can receive as much as 37 percent of a borrower’s entire loan amount, half in collection costs and half in taxpayer-funded commissions. ECMC says it typically collects 31 percent, or $7,750 on a $25,000 loan. That’s 31 times what it can make for preventing the default through counseling.

In 2010, ECMC generated $131 million from collections, or about three quarters of its revenue, compared with about $17 million from programs aimed at preventing default.

In terms of caseload, ECMC devotes more employees to default prevention than collections, Hawn said. The company averages 77 default-prevention workers for 241,000 delinquent borrowers in need of counseling. It has about 90 debt collectors for 557,000 borrowers in default.

Guaranty agencies now rely even more on collections after the Obama administration in 2010 stopped private lenders from offering federal student loans. The Education Department has since issued all new loans directly — cutting out a major source of fees for guaranty agencies.

Last year, Education Secretary Arne Duncan, whose annual salary is just under $200,000, asked the guaranty agencies to choose either debt collection or default prevention. He cited “poorly aligned incentives” because agencies make so much more money collecting on defaults.

The request was voluntary, and two dozen agencies submitted proposals. ECMC wasn’t one of them.

American Student Assistance, a guaranty agency in Boston, proposed getting paid based on the loans it keeps current.

“You shouldn’t profit from defaulted borrowers” as a public-service organization, said Paul Combe, who received $364,300 in 2010 as CEO of the agency.

The National Council of Higher Education Loan Programs, which represents guaranty agencies, says the organizations prevented 88 percent of seriously delinquent loans from defaulting in 2009, the most recent year for which data is available.

“There’s no factual basis for this claim that the incentives are misaligned,” Shelly Repp, president of the Washington, D.C.-based council, said, referring to Duncan’s comments.

Off a highway interchange in Oakdale, ECMC operates from a two-story brick building in an office park across from a Target store and McDonald’s restaurant. There is no sign out front, or in the reception area.

Debt collectors work in a “cubicle farm” in a one-story building attached to the main office, according to Shane Kussatz, ECMC’s former director of collections support. There, supervisors would hang pinatas over top producers’ desks, while automatic dialers and other computer systems helped the company track down more borrowers, he said.

“There was a lot of talk about operating as a nonprofit company,” said Kussatz, who took a buyout in January after 12 years at the company. “At the end of the day, our job was to collect debt. I didn’t fool myself.”

ECMC emphasized collections, according to Paul Fiedler, who worked as a default-prevention counselor from 2004 through 2009 in Richmond, Va.

The company asked counselors to call as many as 500 borrowers a month to get them back on track with their payments, said Fiedler. Under the federal program, he could let borrowers defer payments or temporarily reduce outlays because of a job loss or other hardship.

During Fiedler’s night shifts, counselors were expected to stay at their desks, except for bathroom breaks, said Fielder, 67. He left ECMC after it shut down the Richmond office.

“It was an endless job,” Fiedler said. “I don’t know why they didn’t hire more people. A lot of borrowers fell through the cracks. There were not enough hours in the day to get to them.”

Including monthly bonuses tied to his record of preventing defaults, Fiedler earned in the mid-$40,000-a-year range, he said. ECMC’s Hawn said collectors make more than counselors because recovering money from borrowers is “significantly more challenging.”

Default-prevention counselors clamored for the rare openings in debt-collection, Fiedler said.

“Everyone knew that’s where the big money was,” Fiedler said.