With 23 collection agencies working on the U.S. Department of Education's student loan collection contract, and the overall market for higher education debt booming, at least one private equity giant is considering whether to acquire collection agencies involved in the growing niche.
Carlyle Group in a report by FOX Business was cited as one of the firms reviewing the student loan market. Wall Street sees a possible opportunity given that many economists predict massive student loan defaults loom as a result of rising college cost and falling incomes.
Four of the collection agencies on the Education Department's contract are publicly traded and three of them are units of larger companies such as JPMorgan Chase and Sallie Mae. Performant Recovery (PFMT), earned $36 million last year and its shares have risen nearly 20% in the past three months, indicating investors believe higher default rates will make the company more profitable.
Currently, an estimated $121 billion of some $1 trillion in student loans are 90-plus days delinquent. Average tuition at four-year public colleges has more than tripled over the past three decades, according to the Obama administration, and 71% of those who graduated with a bachelors degree carried debt, which averaged $29,400.
Getting students to repay defaulted loans can mean huge profits since the companies fees are based on a percentage of the loans total balance, as opposed to a fee based on servicing a loan. Loans that already are in default generate the biggest profit margins for debt collectors.
Profit margins for collection agencies are approximately 30% as opposed to loan servicers earning roughly 20%.
Some collection industry experts and Wall Street investors believe plans announcedearlier this month by President Obama to forgive student loans could hurt the market. One plan calls on capping student loan monthly payments at 10% of income and potentially forgive remaining balances if certain criteria are met.
But in general most believe such measures would have minimal impact on student loan collections because of the sheer size of the market. Household debt from student loans has risen at a faster pace than any other form of household debt, according to a report by Goldman Sachs.