The U.S. Department of Education is rescinding lucrative contracts awarded to two companies to collect overdue student loans after several rivals protested the selection of the firms — one of which had financial ties to Education Secretary Betsy DeVos.
Attorneys for the department notified the U.S. Court of Federal Claims on Thursday night of the agency’s plan to scrap debt-collection contracts awarded to Windham Professionals and Performant Financial, a company DeVos invested in before becoming secretary. Without providing details, the attorneys said the Education Department is changing its requirements for the collection and resolution of overdue debts, rendering the contracts unnecessary.
“In the future, [the Education Department] plans to significantly enhance its engagement . . . to help borrowers more effectively manage their federal student loan debt,” the attorneys said in the court filing. The Education Department “expects these enhanced outreach efforts to reduce the volume of borrowers that default, improve customer service to delinquent borrowers, and lower overall delinquency levels.”
As a result, the Education Department expects the 13 private debt-collection companies already under contract will be able to absorb new accounts while the agency implements its approach, according to the court filing.
Thursday’s filing is the latest twist in a messy court battle rooted in the federal government’s attempt to whittle down the number of contractors managing its portfolio of tardy education debt. Companies that lost out on a 2016 debt-collection contract have been embroiled in a lawsuit that prevented the federal government from assigning new accounts to firms.
Two years ago, the Education Department made an initial attempt at reducing the roster of contractors, trimming to seven the number of companies managing the portfolio. That sparked protests that were filed with the U.S. Government Accountability Office, which faulted the Education Department for mismanaging some of the bids. A few firms filed complaints with the federal claims court, leading authorities to put a hold on all new assignments. The department had estimated that the order cost taxpayers $640,000 in lost collections in one month.
To put an end to the litigation, a federal judge in December directed the Education Department to complete its selection of loan collectors for the new contract. The agency sought to further shave the number of contractors and decided on just two: Windham and Performant, which beat out nearly 40 other bidders for contracts valued at up to $400 million for each company. But their win was short-lived as several losing companies took legal action. Some questioned the selection of Performant because of its track record with the Education Department.
That record emerged when Performant was among the companies protesting to the GAO about the Education Department’s 2016 contract decision. In its response to the protests, the GAO outlined the Education Department’s evaluation of the dozens of companies that submitted bids. Windham’s management was rated satisfactory and its past performance deemed exceptional, earning the company a spot among the seven firms selected then. Performant’s management was rated marginal, while its past performance as a contractor was deemed satisfactory.
During the latest round of litigation, companies raised questions about Performant’s relationship with DeVos, requesting documents related to the appearance of a conflict of interest between the Education Department secretary and the company.
Performant is linked to LMF WF Portfolio, a limited liability company that once counted DeVos as an investor. LMF was one of several firms involved in providing Performant with a $147 million loan in 2012, according to regulatory filings. DeVos was required to divest from LMF within 90 days of her confirmation as secretary, but at the time of her appointment, Democrats said they were uneasy about the influence the education secretary could still wield over companies with which she had a relationship.
When the Windham and Performant contracts were awarded in January, Education Department spokesman Nathan Bailey said DeVos had “no knowledge, let alone involvement.” Performant’s head of investor relations, Richard Zubek, said at the time the company “has never had any direct or indirect contact with Secretary DeVos or anyone related to Mrs. DeVos.” Zubek did not immediately respond to requests for comment on the cancellation of the contract.
The termination of the debt-collection contracts in some ways mirrors what happened last year with a contract to service student loans. In August, the Education Department canceled a contract solicitation that would have handed the management of its $1.3 trillion portfolio of education loans to a single company, instead of the nine currently charged with the job.
At the time, DeVos said the decision was borne out of the Office of Federal Student Aid’s plan to overhaul the servicing and collection of student loans, a project dubbed the Next Generation Financial Services Environment, or NextGen. The office is creating a single online platform for use by loan servicers and debt collectors to streamline their interaction with borrowers. Higher education policy wonks suspected the new debt-collection contracts could be in jeopardy with the creation of the platform. Based on Thursday’s filing, it appears they were right.