Advocates have accused the government of creating a system that encourages the companies to use high pressure tactics against families.
Two weeks ago, the Education Department said it would end its relationship with five of the 22 private collection agencies it uses after an audit showed the companies misled consumers about a program that helps people who have defaulted on their federal loans to return to good standing.
The firms told borrowers that their late payments would be removed from their credit reports when that was not true. According to the department, employees also misled borrowers into believing that certain collection fees could be waived if they paid up.
The collection agencies say the department’s evaluation was arbitrary and flawed. Coast Professional, Enterprise Recovery Systems and National Recoveries have filed lawsuits against the government over the last few days, while Pioneer Credit Recovery is pleading its case for having the contract decision reversed to the Government Accountability Office.
In a complaint obtained by the Washington Post, the companies suing the government claim examiners used a sample of a few dozen calls out of tens of thousands and arrived at an inflated error rate. They also say that the errors that cost them the contract were a part of the guidance manual provided by the department. The companies say the government did not give them any notice before canceling their contracts or any chance to appeal the decision.
Officials at the department declined to comment, as did Enterprise and Pioneer. National Recoveries and West Asset Management did not return calls for comment.
In a statement, Coast Professional chief executive Brian Davis said, “Coast has followed the Education operations manual regarding offers to remove the negative information regarding repayment from credit reports and the waiving of collection fees, both which are specifically allowed by the Department of Education.”
When the department announced the contract cancellation, Pioneer, which is owned by Sallie Mae’s former subsidiary Navient Solutions, denied any wrongdoing. Officials at the company insisted that the company is “committed to providing … the support needed to help borrowers achieve success.”
Losing its contract with the government would be a costly blow for Pioneer. The company, which has worked with the department since 1997, said it earned $65 million last year alone from recovering past-due student loans payments for the government. It expected to make as much as $48 million this year, before the department called it quits.
Pioneer has filed a formal protest with the GAO, which resolves disputes between federal agencies and contractors as an alternative to litigation. The GAO has 100 days to make a recommendation, which is not legally binding.
Meanwhile, a federal judge has consolidated all three lawsuits and scheduled oral arguments in the case for April 8.
A report from the National Consumer Law Center in the fall accused the department of creating a system that encourages collection agencies to use high pressure tactics. Researchers found that the more money debt collectors recouped in loan payments, the higher they scored and the more money they received from the department.
Agencies, for instance, receive a commission of up to 13 percent of the loan amount if they can get a borrower in default to begin making payments, according to the report. By comparison, the commission for getting a borrower to consolidate a loan is 2.75 percent of the loan amount.
Pioneer and Enterprise had among the highest scores of all the collection agencies. The report also cited complaints from borrowers who said they were given false information from debt collectors about whether they qualified for loan consolidation, forgiveness or income-based repayment.
Many of the same complaints have been documented by the Consumer Financial Protection Bureau. The bureau said last week that its examinations of debt collectors working for the Education Department uncovered instances of companies overstating the benefits of federal student loan rehabilitation or threatening to take legal action against borrowers.
As early as this month, the Education Department is set to release a revised payment structure that factors in consumer complaints in deciding how to rank and pay collectors. The department’s Office of the Inspector General has been critical of officials for not doing enough to track and respond to complaints filed against collection agencies.
Against this backdrop, the Treasury Department said in November that it would launch a pilot program to wrest some student loan accounts out of the hands of the department’s debt collectors. Treasury is trying to determine how to improve the current debt collection system.