Private vs. Federal Student Loans: Different Rules, Different Collection Strategies

This article was originally posted on the Ontario Systems blog.

Casey Stanley

It’s a tempting prospect: the student loan market now represents the second-largest debt pool in the U.S., second only to home mortgages.

And despite a size surpassing $1 trillion, it shows no signs of slowed growth as sluggish economic recovery has contributed to a 13.7% compounded annual growth rate since 2004. It comes as little surprise that many collection agencies are rushing to get their feet wet, since even a small slice seems like it can yield a big return.

But many don’t realize that the fractured nature of the student loan market presents challenges for even seasoned ARM industry vets that many are, at least as of yet, unprepared to handle. We’re speaking, of course, about the differences between private and public student loans here. And if you aren’t an expert on what makes them unique, you absolutely should be before dipping your feet in the industry’s hottest debt pool:

Two markets, rolled into one

Federal student loans – the Stafford, Perkins, and PLUS categories – make up the majority of the student loan market, totaling about $850 billion. Private student loans make up “only” $150 billion of the total pool. That’s because federal student loans are often the student’s first stop when looking to pay tuition, while private loans make up the difference between what the government will grant them, and the amount that their education actually costs.

Collection agencies often find themselves engaging with private loans first, since they’re handled in many of the same ways standard bank loans are, meaning it’s less of a stretch for an agency’s processes and systems to serve that purpose, at least at the outset. A federal loan, on the other hand, is a more complicated animal, involving many nuances that take a good deal of time to learn. Experts on student loans tend to work them on two separate platforms, instead of as a single category. And many agencies have already learned the hard way how lengthy and costly the process of winning a bid to work on federal student loans can be, especially since the Department of Education only opens itself up to new partnerships periodically.

Different rules, different collection strategies

Because private loans aren’t guaranteed or subsidized by the government, they have different interest rates, different types of interest, a different default period, and a whole lot more. When dealing with student loans, you need separate collection strategies for each that consider their specific natures and timelines, so you can notify accounts of changing balances, payments, and delinquencies. That means establishing different workflows for each as well so your agents can work your account inventory more efficiently.

If you’re an agency figuring out how to add student loans to your portfolio, having some kind of system in place to automate working that inventory is absolutely paramount. The number of ins, outs, and contingencies surrounding how, when, and what you can collect is staggering enough when dealing with a single category. When you roll two into one – private and federal, in this instance – it becomes near-unmanageable without aid.

Different demographics define message delivery

Student loans are almost always attached to one name, but often paid by another – Checks are usually sent to a debtor in their 20s, while at least 60% of the time they’re repaid by parents in their 50s or 60s. Those are two very different audiences: Millennials are more transient, less likely to use a landline phone, and used to digital communication channels like email and social media for communication. That presents different challenges for communicating private and federal student loan collections.

First, you need a system with channels in place to communicate with two separate demographics. Second, your collectors need to be trained to handle two different types of concerns that each will have when you finally make contact. And third, the system as a whole needs to deliver accurate, relevant information for two different types of debt.

Still think you’re ready to launch?

Learn more about the many intricacies you need to know about the student loan market prior to launch from experts Brad Dey, Brian Davis, and Jason Harrington – Register today for insideARM’s free webinar, “Demystifying Student Loans,” Thursday, March 13, at 1:00PM/ET.

The information contained in this publication is provided solely for educational purposes. Ontario Systems LLC, nor the author, offer any legal or other professional advice. Every effort has been made to make this content as accurate as possible at the time of publication. However, there may be typographical and/or content errors. Therefore, this publication should serve only as a general guide and not as the ultimate source of subject information.