There’s a lot of variation in the way collection agencies recover defaulted student debt for the government. (iStock)

The private collection agencies the government uses to recoup past-due student loans are recovering the most money through a program that helps people exit default and repair their credit, but some companies still rely heavily on garnishing wages, according to new data from the Department of Education.

As a part of President Obama’s Student Aid Bill of Rights, the department must now release quarterly reports on default recovery. The first one, although limited in scope, offers a look at how government contractors are engaging struggling borrowers. Defaults in the federal student loan portfolio have been climbing for several quarters, with 7.6 million people at least nine months behind at the end of September. How collection agencies make those borrowers current on their debt has lasting consequences.

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Through the three months ending in September, 22 collection agencies recovered $1.9 billion in defaulted student debt for the department. Three-fourths of the total recoveries were through the federal student loan rehabilitation program, which erases the default from a person’s credit report after nine consecutive payments over a 10-month period.

Another 11 percent of recovered dollars were the result of loan consolidations, whereby borrowers roll their defaulted loans into a new direct loan after making three consecutive payments or through a repayment plan tied to their income. Nine percent of the money the agencies recouped was due to wage garnishments, while five percent were voluntary payments by borrowers.


The government has extraordinary power to collect federal debt by seizing tax refunds or a portion of a person’s paycheck, Social Security or disability income. Collection agencies have the right to use those measures, but the department pays them more to rehabilitate loans because defaulting can severely damage a person’s credit, making it much harder to buy a house or car.

Still, some companies readily use garnishment to collect. Although most of the money Progressive Financial Services recovered for the government came through the rehabilitation program, at least 17 percent was the result of taking a portion of someone’s paycheck, the highest rate among all of the agencies. NCO Financial Systems and West Asset Management used the same tactic to recover about 15 percent of the money they got for the government. Calls and emails to the companies for comment were not immediately returned.

West Asset Management is one of the five private collection agencies the department fired in February for giving  people incorrect information about the rehabilitation program. Employees, according to the government, misled borrowers into believing that certain collection fees could be waived and late payments removed from their credit report if they paid up.

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Three of the agencies — Coast Professional, Enterprise Recovery Systems and National Recoveries — sued the government, claiming that examiners used a sample of a few dozen calls out of tens of thousands and arrived at an inflated error rate. A judge dismissed the lawsuit in April, but the companies are appealing. Pioneer Credit Recovery, the other agency, tried unsuccessfully to have the Government Accountability Office reverse the contract decision.

Nevertheless, the five agencies are still collecting on accounts in active repayment, though all of their unpaid accounts have been transferred to other agencies. The department said the change in inventory makes the recovery rate for the five companies appear higher than other agencies.

The Education Department has been under pressure from lawmakers and advocates to crack down on its debt collectors. A Consumer Financial Protection Bureau examination of agencies working for the government uncovered instances of companies overstating the benefits of loan rehabilitation and threatening to take legal action against borrowers. The department’s Office of the Inspector General has also been critical of officials for not doing enough to track and respond to complaints filed against collection agencies.

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