The Education Department plans to stop using private debt collectors to handle overdue student loans, a practice that had drawn scorn from activists who said the companies stop at nothing in pursuit of tardy loans.
The decision emerged this week in a legal filing, in which attorneys for the department implored the U.S. Court of Federal Claims to dismiss a lawsuit filed by collection agencies vying for a federal contract. The attorneys say the case is no longer relevant because the Education Department is revamping the collection and resolution of overdue student debt.
Instead of having private collection agencies solely dedicated to recouping past-due education loans, the department will add those duties to the responsibilities of companies that service loans. Those companies will try to help borrowers who fall behind on their payments before they end up in default.
The strategy is part of a broader overhaul of the federal student loan program, a project dubbed the Next Generation Financial Services Environment, or NextGen. While the Federal Student Aid office implements its new approach, the 13 private debt-collection companies already under contract will absorb new accounts until the transition is completed. The department has yet to set a completion date.
“Federal Student Aid’s need for private collection agency services as a function separate from the work provided by the enhanced servicer(s) will diminish rapidly in the coming months and ultimately become nonexistent,” the attorneys said in the court filing.
The private collection agencies involved in the case could not immediately be reached for comment.
The Education Department’s use of collection agencies has long been a point of contention among liberal lawmakers and advocacy groups. Critics say the private firms pursue collection at all costs, with no consideration for providing borrowers with sustainable solutions to managing their debt.
“Private collection agencies are expensive, not well incented to help borrowers, and complicate the process by taking defaulted students out of one system and putting them into another,” said Clare McCann, a former policy adviser at the Education Department during the Obama administration who is a senior policy analyst at New America, a think tank.
ACA International, the trade group representing debt collectors, contends that its members work to ensure that their employees comply with the rules set by lawmakers and enforced by government agencies.
“The accounts receivable management industry is critically important to the overall success of the U.S. economy, and to consumers’ ability to access credit,” Mark Neeb, chief executive of ACA International, said in an email.
The court filing is the latest turn in a battle rooted in the federal government’s attempt to whittle down the number of contractors managing overdue education debt. Companies that lost out on a 2016 debt-collection contract protested the decision to the Government Accountability Office, which faulted the Education Department with mismanaging some of the bids. A few firms filed complaints with the federal claims court, leading authorities to put a hold on assigning new accounts to firms.
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 Professionals and Performant Financial, a company in which Education Secretary Betsy DeVos invested before becoming secretary.
The winners beat out nearly 40 other bidders for contracts valued at up to $400 million for each company. Several losing firms took legal action, with some questioning the selection of Performant, because of its lackluster track record with the Education Department.
Companies also raised questions about Performant’s relationship with DeVos, requesting documents related to the appearance of a conflict of interest between her and the company. An Education Department spokesman has said DeVos divested from the firm within 90 days of taking office and had no involvement in the contract decision.
Earlier this month, attorneys for the Education Department notified the courts of the agency’s plan to rescind the contracts it awarded to Windham and Performant, because of its new strategy for handling tardy loan payments.
In the latest filing, attorneys reiterated that the current contract solicitation “will not meet the needs and requirements of [Federal Student Aid] for the work to be performed by the enhanced servicer. The new approach will place a greater emphasis on customer service and early outreach to address delinquencies with the full range of early options for borrowers.”
A dozen congressional Democrats sent a letter in January urging DeVos to reconsider the use of the collection firms, because of the excessive cost to taxpayers and concerns about their effectiveness. Collection costs, the lawmakers argued, consume roughly 20 cents of every dollar borrowers pay, regardless of whether the amount comes close to the actual cost borne by the debt collector.
Last year, the federal government spent about $700 million on debt collection for fewer than 7 million borrowers in default — nearly the same amount it spent on loan servicing for more than 33 million people paying down their debt, according to an analysis by the Center for American Progress, a think tank. The Consumer Financial Protection Bureau estimates that, in some cases, the Education Department pays private collection agencies nearly $40 in compensation for every $1 in cash recovered from some borrowers whose loans are placed back into repayment through a rehabilitation program.
“The Education Department’s contracts with private student loan debt collectors are a nightmare for student borrowers and a waste of hundreds of millions in taxpayer dollars,” Sen. Elizabeth Warren (D-Mass.), one of those who sent the letter to the department, said Friday in a statement. “Many of these companies have a disturbing history of lying to student borrowers and breaking the law. It’s time for this gravy train to start coming to an end.”