Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

Federal Perkins Loan Program - Due Diligence - Loan Collection

AwardYear: 1997-1998
EnterChapterNo: 6
EnterChapterTitle: Federal Perkins Loan Program
SectionNumber: 7
SectionTitle: Due Diligence - Loan Collection
PageNumbers: 77-86


COLLECTION PROCEDURES

Collection procedures are the more intensive efforts a school must
make when borrowers have not responded satisfactorily to billing
procedures and are considered seriously in default.

[[Report default to credit bureau]]
The FIRST step a school must take in the collections process is to
report a defaulted loan account to a national credit bureau
organization with which the U.S. Department of Education has an
agreement. (The debtor has the right to appeal the accuracy and
validity of the information reported to the credit bureau.)

[[Report changes in loan status to credit bureau]]
The school must report any changes in the status of the borrower's
loan account to the same national credit bureau to which the school
originally reported the default. The school must use the reporting
procedures required by that credit bureau. The school must also
respond within one month to any inquiry received from that or any
other credit bureau about the information reported on the loan
amount.

[[School or firm collects]]
The SECOND step the school must take in the collections process is
to attempt collection by either using its own personnel or hiring a
collection firm.

If the school's personnel or the collection firm cannot convert the
account to regular repayment status by the end of 12 months (or if
the borrower does not qualify for forbearance, deferment,
postponement, or cancellation), the school has two options--either to
litigate or to make a second effort to collect.

[[Procedures for second effort to collect]]
A second effort to collect requires one of the following procedures:

- If the school first attempted to collect by using its own personnel,
it must refer the account to a collection firm unless state law
prohibits doing so.

- If the school first used a collection firm, it must attempt to collect
by using its own personnel or by using a different collection firm,
or the school must submit the account to the Department for
assignment.

If a collection firm (retained by a school as part of its second effort
to collect) cannot place an account into regular repayment status by
the end of 12 months (or if the borrower does not qualify for
forbearance, deferment, postponement, or cancellation), the firm
must return the account to the school.

[[Procedures if school is unable to collect]]
If the school is unsuccessful in its effort to place the loan in
repayment after following the procedures above, the school must
continue to make annual attempts to collect from the borrower until

- the loan is recovered through litigation;

- the account is assigned to the Department; or

- the loan is written off.

[[Ceasing collection activity on defaulted loans]]
A school may cease collection activity on a defaulted account with a
balance of less than $25.00, including outstanding principal, accrued
interest, collection costs and late charges if the borrower has been
billed for this balance. The school will not have to exercise required
due diligence even though interest will continue to accrue and may
put the account over $25.00. The school must document that it
ceased collection activity when the account was under $25.00.
However, the school will not be able to assign the account to the
Department, and the borrower will remain responsible for repaying
the account, including accrued interest. The account will still be
included in the school's cohort default rate, if applicable, and the
borrower is still in default and ineligible for Student Financial
Assistance (SFA) funds.

A school may cease collection activity on defaulted accounts with
balances of less than $200, including outstanding principal, accrued
interest, collection costs and late charges, if the school carried out the
required due diligence and if the account has had no activity for four
years. Such an account will be included in the school's cohort default
rate, if applicable. The borrower is still in default and ineligible for
additional SFA funds.

[[Writing off accounts]]
A school may write off an account with a balance of LESS THAN
$5.00, including outstanding principal, accrued interest, collection
costs and late charges. If the school writes off an account, the school
may no longer include the amount of the account as an asset of the
Federal Perkins Loan fund. If a school receives a payment from a
borrower after the loan has been written off, it must deposit that
payment into the fund.

[[Assessing collection costs against borrower]]
The school must determine the amount of collection costs to be
charged to the borrower for address searches, collection, litigation,
use of contractors for collection of the loan, and/or bankruptcy
proceedings. The collection costs must be based on either actual
costs incurred in collecting the borrower's loan or average costs
incurred for similar actions taken to collect loans in similar stages of
delinquency. The school must assess all reasonable collection costs
against the borrower without regard to any provisions of state law
that would conflict with the above provisions.

[[Limit collection charges on older notes]]
For loans made from 1981 through 1986, many promissory notes
contain a limitation on the amount of costs that can be recovered
from the borrower (25% of the outstanding principal and interest due
on the loan). As this provision has not been applicable since the
beginning of the 1987-88 award year, if these borrowers ask for new
advances, the Department strongly encourages schools to issue new
promissory notes without this provision and to require the provisions
of the new note to apply to repayment of previous advances. The
borrower will then be liable for ALL collection costs on all of his or
her outstanding loans borrowed under this program. A school should
note, however, that advances made prior to the signing of the new
note do not qualify for new deferment and cancellation benefits.

The school determines what collection costs are reasonable, as long
as they are based either on actual costs the school incurs for the
particular borrower or on average costs incurred in collecting loans
in similar stages of default. The school should explain to the
borrower how it calculates collection costs, based on the cost
analysis used to support charges of these costs to the Perkins Loan
Fund. The school must be able to document the basis for the costs
assessed.

ACTIONS A SCHOOL MAY TAKE TO AVOID LITIGATION

Before filing suit on a loan, a school may waive all collection costs
on a loan if the borrower makes a lump-sum payment of the entire
amount outstanding, including principal and interest; a written
repayment agreement is not a precondition. The amount waived may
be charged to the Perkins Loan Fund.

Another alternative is for the school to waive a PORTION of the
collection costs on a loan if doing so will give the school greater
flexibility in negotiating repayment. The school may waive a
percentage of the collection costs, applicable to the amount then due
on the loan, equal to the percentage of the past-due balance the
borrower repays within 30 days of entering into a written repayment
agreement with the school. For example, if the borrower repays one-
half the outstanding balance on a loan within 30 days of the
agreement, the school may waive one-half of the collection costs
incurred through the date of that payment. The amount waived may
be charged to the Perkins Loan fund.

As stated earlier, a school may write off an account with a balance of
LESS THAN $5.00, including outstanding principal, accrued
interest, collection costs and late charges but may no longer include
the amount of the account written off as an asset of the Perkins Loan
fund.

[[Compromise]]
A school may compromise on the repayment of a defaulted loan if
the school has fully complied with all due diligence requirements and
the student borrower pays in a single lump-sum payment

- at least 90% of the outstanding principal balance on the loan;

- all interest due; and

- any collection fees due.

The federal share of the compromise repayment must bear the same
relation to the school's share of the compromise repayment as the
Federal Capital Contribution (FCC) to the school's loan fund under
this part bears to the school's Institutional Capital Contribution (ICC)
to the fund.

The Federal Family Education Loan (FFEL) Program regulations
allow a borrower to receive a Federal Consolidation Loan that could
include a defaulted Perkins Loan, National Direct Student Loan
(NDSL), or Defense Loan on which the borrower has made
satisfactory repayment arrangements if the defaulted loan will reenter
repayment through consolidation. Consolidation Loans are discussed
in Chapter 10.

Similarly, the William D. Ford Federal Direct Loan Program allows
a borrower to receive a Direct Consolidation Loan that could include
a defaulted Perkins Loan, NDSL, or Defense Loan. To consolidate a
defaulted loan, the borrower must either agree to repay the Direct
Consolidation Loan under that program's income-contingent
repayment plan, or he or she must make satisfactory repayment
arrangements on the defaulted loan before consolidating. Direct
Consolidation Loans are discussed in Chapter 11.

The amount eligible for consolidation under either program is the
sum of the unpaid principal, accrued unpaid interest, late charges,
and outstanding collection costs. For the purpose of consolidating a
loan made under the Perkins Loan Program, a borrower is considered
to have made satisfactory repayment arrangements on a defaulted
loan under either of the consolidation programs by making three
consecutive monthly payments on time. A defaulted loan that is
being repaid under a COURT ORDER remains in default status until
paid and is not eligible for consolidation.

LITIGATION

If the collection procedures described in this section do not result in
the repayment of a loan, the school must determine at least once a
year whether all the conditions listed below are met. If so, the school
must litigate. The conditions are

[[HEA Section 484A(a)]]
- the total amount owed, including outstanding principal, interest,
collection costs, and late charges, on all the borrower's Perkins
Loans and NDSLs at the school is more than $200;

- the borrower can be located and served with process;

- the borrower either has enough assets attachable under state law to
cover a major portion of the debt or enough income that can be
garnished under state law to satisfy a major portion of the debt
over a reasonable period of time;*1*

- the borrower does not have a defense that will bar judgment for
the school;*2* and

- the expected cost of litigation (including attorneys' fees) does not
exceed the amount that can be recovered from the borrower.

Even if all the above conditions are NOT met, the school may sue if
it chooses to do so. No federal or state statute of limitation can apply
to enforcement actions to collect Perkins Loans or NDSLs.

The school must attempt to recover from the borrower all litigation
costs, including attorneys' fees, court costs, and other related costs, to
the extent permitted by applicable state law. The school is also
required to try to recover all costs previously incurred in the
collection of overdue payments if these collection costs have not
been paid by the borrower; a percentage of these unrecovered costs
may be charged to the fund as explained below.

[[Assignment of amount of $25 or more]]
If the school cannot collect a payment after following all collection
procedures (including litigation, if required), it may, with the
Secretary's approval, assign the account to the Department for
collection. A school may assign a loan to the Department for
collection if the amount outstanding is $25 OR MORE, including
principal, interest, collection costs, and late charges.

If the school has a cohort default rate of more than 20% as of
June 30 two years before the school submits an assignment request,
the school must provide documentation to the Department that it has
complied with all of the due diligence requirements discussed in this
chapter.

DEPOSIT OF FUNDS COLLECTED

A school must deposit any funds collected into an interest-bearing
bank account. A collection agency, collection attorney, or loan
servicer is required to deposit funds collected into an interest-bearing
account only if the agency, attorney or servicer holds such amounts
for more than 45 days. The account must be insured by an agency of
the federal government, secured by collateral of reasonably
equivalent value, or invested in low-risk income-producing
securities, such as obligations issued or guaranteed by the United
States.

A school may deduct from the interest earned any bank charges
incurred as a result of maintaining the fund assets in an interest-
bearing account, such as service charges, and deposit only the net
earnings into the fund.

COSTS CHARGEABLE TO THE FEDERAL PERKINS LOAN
FUND

The following costs of actions a school takes in an attempt to collect
past-due payments on a loan must be charged to the borrower: billing
costs associated with past-due payments (not routine billing costs)
and costs of address searches, collection, litigation, the use of
contractors, and bankruptcy litigation.

[[Billing costs for past-due payments sometimes chargeable]]
The only BILLING COSTS a school may charge the fund are the
costs of telephone calls made to demand payment of overdue
amounts not paid by the borrower. If the amount recovered from the
borrower does not suffice to pay the amount of the past-due
payments and the penalty or late charges, the school may charge the
fund for only the unpaid portion of the actual cost of the calls.

Only the collection costs discussed below that are WAIVED OR
NOT PAID BY THE BORROWER may be charged to the Perkins
Loan fund:

- COLLECTION COSTS WAIVED. As stated earlier, a school may
waive all collection costs on a loan if the borrower, within 30 days
of entering into a new repayment agreement, makes a lump-sum
payment of the entire amount outstanding or may waive a
percentage of the collection costs equal to the percentage the
borrower pays on the amount outstanding on the loan within 30
days of entering a new repayment agreement. The amount waived
may be charged to the fund.

- COST OF A SUCCESSFUL ADDRESS SEARCH. A reasonable
amount for the cost of a successful address search, if not paid by
the borrower, may be charged to the fund provided that the school
either used a commercial skip-trace service or its own personnel,
employing methods comparable to commercial skip-tracing
practices. Defining a reasonable amount is left to the school.

- COST OF REPORTING DEFAULTED LOANS TO CREDIT
BUREAUS. The following costs not paid by the borrower may be
charged to the fund: the cost of reporting a defaulted loan to a
credit bureau, reporting any change in the status of a defaulted
account to the bureau to which the school had previously reported
the account, and responding to any inquiry from a credit bureau
about the status of a loan.

- COLLECTION COSTS. Collection costs not paid by the borrower
may be charged to the fund if they do not exceed--for first
collection efforts--30% of the total principal, interest, and late
charges collected and--for second collection efforts--40% of the
principal, interest, and late charges collected. The school must
reimburse the fund for collection costs initially charged the fund
but subsequently paid by the borrower.

- COLLECTION COSTS RESULTING FROM LITIGATION,
INCLUDING ATTORNEY'S FEES. Collection costs resulting
from litigation, including attorney's fees, may be charged to the
fund if not paid by the borrower, but must not exceed the sum of

- court costs specified in 28 U.S.C. 1920;

- other costs incurred in bankruptcy proceedings in taking actions
required or authorized under 34 CFR 674.49;

- costs of other actions in bankruptcy proceedings to the extent
that those costs together with other costs incurred in bankruptcy
proceedings do not exceed 40% of the total amount of judgment
obtained on the loan; and

- 40% of the total amount recovered from the borrower in any
other proceeding.

- COSTS OF FIRM PERFORMING BOTH COLLECTION AND
LITIGATION SERVICES. If a collection firm agrees to perform
or obtain the performance of both collection and litigation services
on a loan, the amount for both functions that may be charged to
the fund may not exceed the sum of 40% of the amount of
principal, interest, and late charges collected on the loan, plus
court costs specified in 28 U.S.C. 1920.

[[Documentation of costs charged to the fund]]
For audit purposes, a school must support costs charged to the fund
with appropriate documentation including telephone bills and
receipts from collection firms. Due diligence activities involving
FIXED COSTS (telephone contacts, credit bureau reporting, and
bankruptcy procedures) may be charged to the fund whether or not
the actions are successful. Other activities, such as address searches,
collection, and litigation (other than bankruptcy), are typically
performed on a CONTINGENT-FEE basis; if these activities are
successful, the school may charge the fund for the costs associated
with them under the conditions stated previously. Because the school
incurs no costs if these activities are not successful, it may not charge
the fund for them unless they are successful.

As stated earlier, a school may write off a student's account if the
total amount owed on the account is less than $5.00. "Total amount
owed" means outstanding principal, accrued interest, collection costs,
and late charges. If the school writes off an account, it no longer
includes it as an asset of the fund. If the school receives a repayment
from the borrower after the loan has been written off, the school
must deposit it into the fund.

USING BILLING AND COLLECTION FIRMS

The school may use a contractor for billing or collection, but the
school is still responsible for complying with the Subpart C
regulations regarding those activities. For example, the school, not
the billing or collection firm, is responsible for deciding whether to
sue a borrower in default. The school is also responsible for
decisions about canceling, postponing, or deferring repayment,
granting forbearance, extending the repayment period, and
safeguarding the funds collected.

A school using a billing service may not use a collection firm that
owns or controls the billing service or is owned or controlled by the
billing service. In addition, a school may not use a collection firm if
both the collection firm and billing service are owned or controlled
by the same corporation, partnership, association, or individual.

[[Quarterly activities report]]
A school using either a billing service or a collection firm must
ensure that the service or firm issues, at least quarterly, a statement
showing the activities for each borrower, such as amounts collected
or changes in the borrower's name, address, telephone number, or
Social Security Number, if known. The service or firm must also
give the school, at least quarterly, a list of charges for skip-tracing
activities and telephone calls.

The school must also ensure that the billing service or collection firm
instructs the borrower either to mail payment checks to the school
directly or to a bank where a lock-box is maintained for the school.
Alternatively, the service or firm may deposit the funds into an
interest-bearing institutional trust account.

If a billing service or a collection firm is depositing funds received
directly from the borrower into an institutional trust account, this
institutional trust account must be an interest-bearing account if
those funds will be held for longer than 45 days. A billing service is
not permitted to deduct its fees before depositing the amount it
receives from borrowers. A collection firm may deduct its fees
before depositing the funds it receives from borrowers if the school
authorizes it to do so.

The firm may commingle in its accounts the funds collected as long
as it can identify the interest earnings and the amount collected by
the institution. If a COLLECTION firm chooses this last procedure,
it may, IF THE SCHOOL AUTHORIZES IT, deduct its fees before
depositing the amount collected. A BILLING service may NOT
deduct its fees from the amount it receives from borrowers.

[[Fidelity bond or comparable insurance]]
Just as schools are required to keep adequate fidelity bond coverage
to protect the government's interest in the Student Financial
Assistance (SFA) funds they receive, it is appropriate to ensure the
same sort of protection from third parties who handle Perkins Loan
Program funds for the school. Accordingly, a school must ensure that
its billing service and collection firm maintain a fidelity bond or
comparable insurance to protect the accounts they service. Billing
services (and COLLECTION FIRMS NOT AUTHORIZED TO
DEDUCT THEIR FEES from borrowers' payments) must be bonded
or insured in an amount not less than the amount of funds the school
expects to be repaid in a two-month period on the accounts it refers.

[[Larger bond for collection firm that deducts fees]]
Collection firms authorized to deduct their fees from borrowers'
payments must be bonded or insured:

1. If the amount the school expects to be repaid in a two-month
period is LESS THAN $100,000, the collection firm must be
bonded or insured in one of the following amounts, whichever is
LESS:

- 10 times the amount the school expects to be repaid on
accounts it refers to the firm during a two-month period OR

- the amount the firm expects to collect in a two-month period on
ALL accounts it has in its portfolio (not just the school's
accounts).

2. If the amount the school expects to be repaid in a two-month
period is $100,000 OR MORE, the collection firm must be bonded
or insured in an amount not less than the amount of funds the
school can reasonably expect to be repaid during that two-month
period. THE BOND OR INSURANCE MUST NAME THE
SCHOOL AS BENEFICIARY. (This is not a requirement
when the payments expected in a two-month period are less
than $100,000.)

The school must review annually the amount of repayments it
expects to receive from billing or collection firms to ensure adequate
bond or insurance coverage.

[[Law firm as collection firm]]
A school using a law firm to collect must review the firm's bond or
its insurance policy to determine whether the firm is protected
against employee misappropriation. If the firm's malpractice
insurance also covers misappropriation of funds, that policy is
considered to provide coverage.


*1* Defining "a reasonable period of time" is left to the school.

*2* If the school determines that the borrower has a partial defense,
it must weigh the costs of litigation against the costs of recovery
based on the amount of the enforceable portion of the debt.

Last Modified: 07/21/1998