5 Scams and Rackets That Can Turn You Into a 21st-Century Indentured Servant
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America is a debtor nation in crisis. According to one estimate, total consumer debt stands at $11.7 trillion, including $8.2 trillion in home mortgages, $1.1 trillion in student loans and $854.2 billion in credit card debt. While the banks were made whole from the Great Recession, ordinary people, especially homeowners who lost their houses, got screwed. And the faltering recovery has only left ordinary Americans worse off. Wages are flat and consumer spending is sluggish; home foreclosures are declining but there were still 1,361,795 foreclosures in 2013; consumers are shifting to a cash-and-carry system, adopting bank debit payments, and cutting back on the use of credit cards. More and more Americans are fighting to stay out of the debt hole, though the average U.S. household is already carrying $203,000 in debt.
This crisis has deep historical roots, and the federal government has taken important steps to curtail it. In 1867, the U.S. Congress passed the Peonage Abolition Act, ostensibly ending indentured servitude. A century-plus later, the Supreme Court ruled in Bearden v. Georgia (1983) that courts cannot imprison a person for failure to pay a criminal fine unless the failure to pay was “willful.” Yet today, failure to pay a parking ticket can trap you in a life of peonage and even land you in jail.
While the economy continues to stutter along, the peonage industry—what used to be called usury—is growing. More troublingly, it is targeting the most vulnerable segments of our population; the poor, the working class and the elderly are being remorselessly squeezed. Here are five ways the peonage industry is creating a new, 21st-century form of the old-fashioned debtors’ prison.
1) Defaults for Profit
A recent report by Fox Business noted that the Carlyle Group, a huge private-equity investment firm, was assessing its entry into the student loan racket. With more than $1 trillion in student debt outstanding, they see an opportunity to make some easy money. Carlyle is looking into acquiring student-loan collection agencies—companies that go after students who have defaulted on their loans.
According to the U.S. Department of Education, federal loans enter default when payments are more than 270 days past due. Its most recent data (for those beginning repayment in 2010) indicates that the student college default rate is at nearly 15%.
An estimated $121 billion of the $1 trillion in student loans is 90-plus days delinquent. Industry experts peg the profit margins for collection agencies at roughly 30%, as opposed to the loan servicers earning roughly 20%. According to one source cited by Fox, “collection agencies can earn 10% to 15% of the entire loan balance.” These companies are estimated to receive about $1 billion annually in commissions.
When an individual is in default, collection agencies can garnish up to 15% of his paycheck and seize his Social Security, disability income, and federal and state income tax refunds. They can also add collection fees to an outstanding debt—and that’s where Carlyle sees the opportunity.
While people who default on their student loans cannot be arrested, unscrupulous debt collectors often threaten those in default with criminal prosecution and jail time. Equally troubling is the fact that a growing number of students who have taken out super-sized loans now find themselves trapped in low-wage jobs with their future prospects looking dim. For them and many others, the American Dream is turning into a nightmare.
To help address the student debt crisis, President Obama recently introduced a “loan forgiveness plan” for those who’ve made regular payments for a minimum of 20 years. In addition, the administration cut the commissions paid to private collection companies to 11% from the previous 16% fee.