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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: May 15, 2012

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Earlier this year, Congressman Hansen Clarke of Detroit pitched a new bill that sparked a wildfire of support amongst the younger generations. His proposal, the Student Loan Forgiveness Act of 2012, otherwise known as HR4170, sought to forgive student loans for all borrowers who have made payments equal to 10 percent of their discretionary income for 10 years.

“It’s time for Congress to stand up for the rights of student loan borrowers,” said Clarke as he took the stand in front of his fellow congressmen. “It’s time to forgive these student loans.”

A Short-Sighted Solution

But such a statement isn’t practical, and those who support the bill—at least in its current form—aren’t looking at the big picture.

Rather, those who currently have college-related debt or those who are currently looking for student loans are only thinking about their individual financial futures.

If student loans are forgiven on a grand scale, that existing college debt doesn’t disappear. It gets moved around. Those who are currently burdened with this looming financial obligation may find temporary relief, but the strain will then be placed on the shoulders of those who didn’t necessarily have anything to do with this debt acquisition: the taxpayers.

Is that really true though? Many believe the burden would simply fall onto the desks of lenders, originators, and those who helped create this growing student loan debt bomb. But the sad reality is, we are already paying for other people’s student loans—and mass forgiveness has not even yet occurred.

Educational Credit Management Corporation

In a report by Bloomberg, a debt collector named Joshua Mandelman was found to have made $454,000 in one year—a figure twice that of the annual salary for the U.S. secretary of education.

The CEO that oversaw Mandelman, a former Sallie Mae executive named Richard Boyle, took home $1.1 million in 2010. These men worked for a company called Educational Credit Management Corp. (ECMC), and they’re six- and seven-figure salaries came not from selling a product, but from commissions funded by taxpayer money.

ECMC is but one of 32 guaranty agencies that oversee student loans on behalf of the U.S. Education Department. These companies guaranty college financing taken out by students, and promise to repay lenders in the even a borrower defaults.

If students do default, guaranty agencies front the money, but then hand the failed loan over to the federal government. The federal government then pays the agencies for the amount they fronted, using taxpayers’ hard earned money to hedge any risk these companies take on.

“I’m really proud of what we do as an organization,” Dave Hawn, ECMC’s chief operating officer, told Bloomberg.

Salaries and Bonuses

ECMC’s debt collectors earn a modest salary, ranging from roughly $33,000 to $46,000, but their annual bonuses can be as much as 10 times their base salaries. That means someone making $46,000 a year can potentially pull in an additional $460,000 in bonuses. Bonuses funded by taxpayers.

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

In the meantime, however, ECMC’s CEO is taking home over a million dollars a year, while his top performers are taking home between a quarter and a half a million each year.

And such a standard isn’t exclusive to ECMC. The other guaranty agencies have similar bonus schemes and similar take-home salaries.

Prevention versus Collecting

One of the biggest tragedies of this business is that these companies make more money for collecting than they do preventing.

According to the Bloomberg report, agencies receive 1 percent of a borrower’s total loan amount for preventing default through counseling. For a $25,000, that equates to a meager $250.

But if borrowers default, guaranty agencies can rake in nearly 25 percent of borrowers’ outstanding student loan principal by adding a “collection cost” to borrowers’ payments. On top of the collection cost, agencies get to keep 16 percent of all money recovered.

If collectors were able to persuade defaulted borrowers to make nine payments in 10 months, the organization would receive as much as 37 percent of the borrower’s entire loan amount in compensation. By law, half of that commission is paid for by taxpayers.

“There was a lot of talk about operating as a nonprofit company,” Shane Kussatz, the former director of collections support for ECMC, told Bloomberg. “At the end of the day, our job was to collect debt. I didn’t fool myself.”

According to Paul Fiedler, a former ECMC default-prevention counselor, those in the prevention sector of the company all waited for the rare openings in debt-collection.

“Everyone knew that’s where the big money was,” he told Bloomberg.

Student Loan Jubilee

So right now, we’re standing on the tip of the iceberg. All of us who pay taxes are already funding other people’s student loans (and other people’s six-figure salaries).

But if mass forgiveness occurs, how much more will we contribute not to education, infrastructure, social programs, and things our society benefits from as a whole, but to individuals who the government grants a student loan jubilee to?

That’s not to say our college-bound borrowers don’t need or deserve help. They absolutely do—particularly given the fact that our country’s student loan debt has surpassed even that of our nation’s total credit card debt. There’s an obvious problem here.

The answer, however, is not mass forgiveness. That’s an impractical, economy-damaging suggestion. Try as we might, declaring forgiveness or passing a law to cancel debts does not make outstanding debt disappear. It will be paid for by somebody, and that somebody will be your neighbors, your leaders, your friends, your family, and you.