The Washington PostDemocracy Dies in Darkness

Education Department cuts ties with five of its debt collectors

In this Oct. 6, 2011 photo, Gan Golan of Los Angeles, dressed as the “Master of Degrees,” holds a ball and chain representing his college loan debt during Occupy DC activities in Washington.  (AP Photo/Jacquelyn Martin)
Placeholder while article actions load

The Education Department is canceling its contract with five of the 22 private collection agencies it uses to recoup past-due student loans after years of public criticism over the aggressive practices of some of the debt collectors the department uses.

The decision arrives after a lengthy review of hundreds of phone calls between all of the collection agencies and borrowers who had fallen behind on their loan payments. Officials at the department discovered that five of its collectors had duped borrowers into believing that they could repair their credit or waive collection fees if they paid up.

“Federal student aid borrowers are entitled to accurate information as they make critical choices to manage their debt,” Education Under Secretary Ted Mitchell said in a statement. “Every company that works for the department must keep consumers’ best interests at the heart of their business practices by giving borrowers clear and accurate guidance.”

Calls to four of the five collection agencies — Coast Professional, Enterprise Recovery Systems, National Recoveries and West Asset Management— were not returned.

Pioneer Credit Recovery, which is owned by Sallie Mae’s former subsidiary Navient Solutions, denied any wrongdoing, but insisted that the company is “committed to providing … the support needed to help borrowers achieve success.”

Losing its contract with the government is 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.

The Education Department has been under pressure from lawmakers and consumer advocates to crack down on debt collection agencies for their aggressive tactics.

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. Pioneer was one of the highest scoring companies.

“It’s really interesting that [the Department of Education] is singling out companies that beforehand they were calling top performers,” said Persis Yu, a staff attorney at the National Consumer Law Center. “Now they’re saying they had really unacceptable levels of misinformation. It calls into question the way they evaluate and compensate their debt collectors.”

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.

As early as this month, the 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 whether debt collection services are best left with the government, rather than third-party contractors.

Meanwhile, the Education Department said it would transfer the accounts of the five collection agencies to its other debt collectors.

“Young people have told us for years that private debt collectors refuse to play by the rules and use deceptive tactics that jeopardize their financial security,” said Jennifer Wang, policy director of Young Invincibles, an advocacy group. “We commend the Department of Education’s decision. … Fewer people will be faced with harmful debt collection practices that hurt their credit reports, and mislead them about their options to get out of default.”