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Jody Sofia borrowed $92,500 to get a degree from Florida Coastal School of Law. Now she’s in default, her outstanding balance having ballooned to almost $144,000, and she spends her days fielding calls from government-contracted debt collectors.

The companies making those calls are just one part of an ecosystem feeding on federal student loans. There are also debt servicers, refinance lenders, firms that help former students stay out of default and for-profit schools that make money as borrowers try to repay more than $1.2 trillion in government-backed education debt.

Jody Sofia Photographer: Mike Kane/Bloomberg

Sofia is one of 7 million former students in default on a record $115 billion of federal loans, an amount that has grown almost 25 percent in two years, according to U.S. government data. The mountain of debt, for which taxpayers are on the hook, has provided a stream of revenue to companies at every stage of the process.

“This is not some small cottage industry,” said Rohit Chopra, the former student-loan ombudsman for the U.S. Consumer Financial Protection Bureau, which oversees loan servicers, debt collectors and private student lenders. “There is a large student-loan industrial complex. Rising costs of college and flat family incomes have created enormous business opportunity for every step of the loan process.”

‘Really Wrong’

Sofia, who didn’t take the bar exam and never got a legal job after graduating from Florida Coastal in 2004, says the system is dysfunctional. Derailed by illness and having to care for ailing parents, most of her income has come from working as an independent insurance adjuster, the same thing she was doing before going to law school. While she has made some payments, interest on the loans keeps accruing.

“There’s something really wrong with this system,” said Sofia, 45, who was born in Florida, raised in the New York area and recently moved to the West Coast. “The government is spending all this money for these people to constantly call you. How effective is that?”

Denise Horn, a U.S. Education Department spokeswoman, said the agency has been working to improve the experience of borrowers, hold servicers to higher standards and reduce costs.

“The federal student loan program is a critical tool for keeping college within reach for millions of Americans,” Horn said in an e-mail. “From the earliest days of the Obama administration, we have worked to improve the program for students and families, including by cutting out tens of billions of dollars in wasteful subsidies to private banks.”

‘Unnecessarily Complicated’

Companies that have benefited from the loan program range from debt servicer Affiliated Computer Services Inc., now part of Xerox Corp., to Education Management Corp., which operates for-profit colleges and whose largest shareholder is Goldman Sachs Group Inc. Education Management settled with the government in November for almost $100 million over alleged illegal student-recruitment practices without admitting wrongdoing.

FMS Investment Corp., a unit of Ceannate Corp. that tried to collect from Sofia, was paid $227 million by the Education Department from October 2011 through September of this year, the most of any debt-collection company under contract in that period, according to the agency. Florida Coastal is part of the InfiLaw System, a consortium of three schools. A principal investor in InfiLaw is Sterling Partners, a private-equity firm that also owns a stake in Laureate Education Inc., which is planning an initial public offering next year.

Congress created the loan program 50 years ago with the goal of encouraging students to attend college. Today, the Education Department is one of the largest financial institutions in the country. If it were a bank, it would rank fifth in the U.S. in assets.

The government has disbursed about $100 billion in education loans annually since the 2009-2010 school year, according to data compiled by the College Board. Just six years before that, the amount was almost half. The total has doubled since 2007 and is expected to double again in the next decade, as students and their parents borrow for college and graduate school. The sum also is increasing because of accrued interest, including on older defaulted loans like Sofia’s.

Students have six months after leaving school to start repaying loans and are considered in default if they haven’t made a payment for at least 270 days. The national default rate of 11.8 percent for borrowers who entered repayment three years ago doesn’t include former students granted forbearance or hardship deferments, or those using repayment programs based on income, where loans are forgiven after at least 20 years.

“The student loan system is unnecessarily complicated, and at each stage of the process, someone is taking a slice either from the borrower or from the taxpayer,” said Robert Shireman, a former Education Department deputy undersecretary. “It’s an illogical system because the pain that we’re inflicting is not worth what the taxpayers are paying, and it’s the wrong approach to take for people who were trying to do the right thing by getting themselves an education.”

Sofia’s ‘Regret’

For Sofia, the path to default was paved with good intentions. The adopted daughter of a police officer and a ballerina, she didn’t borrow any money to get an associate’s degree from Daytona Beach Community College, now Daytona State College, paying her way by working as an insurance adjuster, she said. It took her eight years.

She earned a bachelor’s degree at age 30 from the University of North Florida in Jacksonville, borrowing about $10,000, some of which she repaid. Then she decided to get a law degree, allowing her to defer payments on the college loan.

“I regret it so much,” Sofia said, explaining that she had to start borrowing after losing a scholarship for failing to keep up her grades. “All I wanted to do was help out people in need.”

Loan Purchases

Sofia’s loans were originated by private lenders, including SLM Corp., and backed by the government. In 2008, during the financial crisis, Congress passed the Ensuring Continued Access to Student Loans Act to keep liquidity flowing. The government purchased $112 billion of existing commercially originated debt, according to the Education Department.

SLM, known as Sallie Mae, reported gross revenue over two years of more than $600 million from the loan-purchase program, and smaller lender Nelnet Inc. had pretax gains of more than $70 million, according to financial statements. Congress changed the loan system in 2010, requiring the government, instead of commercial lenders, to originate federal student debt.

“In the depths of the recession, when credit was virtually unavailable, uninterrupted access to student loans was a public policy priority, which we helped achieve,” said Patricia Nash Christel, a spokeswoman for Navient Corp., which holds the legacy federal loan portfolio spun off from Sallie Mae in 2014.

Ben Kiser, a spokesman for Omaha-based Nelnet, echoed that view of the program’s intent. He said the company’s loans “were sold to the department for par value and a fee to cover origination costs.”

Bar Exam

By the time Sofia left Florida Coastal, she was more than $90,000 in debt. Annual tuition and fees have increased since then to $45,000, and the median debt for students who graduated in the 12 months prior to June 30, 2014, is $178,844, according to data posted by the school in February. More than 90 percent of its students took out loans.

About 60 percent of Florida Coastal law graduates passed the most recent bar exam on the first try, lower than the 70 percent statewide rate, Florida Bar data show.

Sofia, who started studying for the exam, didn’t take the test. Instead, she moved to the New Orleans area to settle insurance claims related to Hurricane Katrina. She said she saw a chance to earn some money there to help pay off her loans and never got back on the legal track.

Scott DeVito, dean of the law school, said an alumni survey showed that almost 90 percent of InfiLaw graduates are working as attorneys five or more years after graduation.

“Experience shows that Coastal Law students have a stellar return on their educational investment,” DeVito said in an e-mail sent on behalf of Jacksonville-based Florida Coastal, InfiLaw and Sterling Partners. “On average, our graduates earn $750,000 more in their lifetime than if they hadn’t received their law degree from Coastal Law.”

Debt Servicers

Sofia made payments when she could. She got forbearance from the debt-servicing company assigned to her case after contracting a bacterial illness she said was related to Hurricane Katrina and later when she was helping support her ailing parents. That allowed her to defer payments. Meanwhile, interest charges kept piling up.

Student-debt servicers process monthly payments and act as the main point of contact for borrowers, similar to mortgage servicers. The Education Department awarded servicing companies $576 million in fees in the most recent fiscal year, according to the Federal Procurement Data System, which tracks what the government makes available to contractors, not what they’re actually paid. Firms typically earn monthly fees by loan status: $2.85 for those in repayment, $1.05 when borrowers are in school and 45 cents when they’re delinquent 361 days or more.

ACS, the Xerox unit, and Navient have serviced Sofia’s debt. Navient disclosed in August that the CFPB, created under the Dodd-Frank Act to increase oversight of consumer financial products, may pursue an enforcement action involving its practices. The agency said this year that loan servicing can lead to “hurdles for distressed borrowers” and sometimes push them into short-term fixes rather than long-term payment-reduction programs. Navient said in the filing that its practices “are lawful and meet industry standards.”

Christel, the Navient spokeswoman, said that when the company can talk with struggling borrowers “nine times out of 10 we can help them avoid default.”

The Education Department is reviewing performance standards for loan servicers ahead of rebidding its contracts next year and plans to introduce a single loan portal for all borrowers, said Horn, the agency spokeswoman.

Double Default

Sofia defaulted on her debt in 2007, according to her loan documents. After getting back on track, working as a waitress and repaying more than $20,000, she defaulted again and began hearing from FMS last year.

FMS’s parent, Ceannate, is one of about two dozen collection firms paid a total of $963 million in the fiscal year that ended in September, according to the Education Department. That’s down from a record $1.1 billion the previous year.

The Education Department is bidding out a new contract, the largest ever, as the volume of defaulted federal loans reaches an all-time high and fees have tripled over the past decade. In July, the agency changed to a fixed fee for rehabilitated loans from a percentage of what was collected.

Collection companies helped recover about $9 billion on more than 1.5 million loans from 2011 to 2013, according to a 2014 Government Accountability Office report.

“Everyone who touches the system performs a different role that adds value to the student,” said Balaji “Raj” Rajan, chief executive officer of Rolling Meadows, Illinois-based Ceannate. “It’s a complex process, and the system would work better if there was more stability. It’s very hard on a program this vast to serve every single borrower without a single failure.”

In February, Ceannate tapped former Education Secretary Margaret Spellings to head an advisory board to provide policy direction. A former department general counsel also sits on the panel, and a former default division director was hired in June as a top official in a unit that works with government contractors to minimize authentication errors. Spellings intends to resign her position before taking over in March as president of the University of North Carolina System, according to a school spokeswoman.

Garnishing Wages

When private companies can’t recover the money, as in Sofia’s case, the Treasury Department garnishes Social Security, tax refunds or wages. Treasury said it had net offsets of $2.27 billion for education debts in fiscal 2015. It has garnished almost $20,000 from Sofia’s tax refunds, she said.

Congress mandated that schools with default rates of 30 percent or higher for three consecutive years lose access to federal loans. Florida Coastal’s default rate is 1.1 percent for the most recent year, well below the national average, according to federal data. Rates are measured by cohort for the year borrowers begin repayment.

Keeping default rates low has spurred a niche industry that provides such services to schools. One firm, i3 Group, is owned by Ceannate.

Corinthian Colleges Inc., the for-profit school that filed for bankruptcy in May in the largest shutdown in U.S. higher education, said it used outside firms and internal resources to reach borrowers for help “with alternatives to default,” according to the company’s 2011 annual report. The Education Department is now forgiving some loans, leaving taxpayers to pick up the tab. Last month, it canceled almost $28 million of debt for 1,300 former students at Heald College, one of Corinthian’s three chains.

Artificially Low

Borrowers can be swayed by calls from companies suggesting deferment or forbearance, which keeps default rates artificially low, according to Debbie Cochrane, research director at the Institute for College Access & Success, an advocacy group.

“That’s not good for students, because it simply kicks the can down the road to default on an even higher balance later on,” Cochrane said.

As for Sofia, she says she’d like to meet with someone to work out a repayment plan rather than field as many as 20 phone calls some days dunning her for money.

“I will pay it when I can,” she said.

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— With assistance by Brian Friel