insideARM has written extensively about the ongoing story of the Department of Education (ED) RFP for Private Collection Agency (PCA) services. But to this point, our coverage has only focused on the decision process, not the impact of the decisions on borrowers and taxpayers. That impact is now considerable.

On Friday, Buzzfeed News published an excellent article about the significant impact to consumers: How the Student Loan Collection System Ground to a Halt. The author, Molly Hensley-Clancy, reduces to plain English the unintended consequences to consumers of the Temporary Restraining Order (TRO) and Preliminary Injunction ordered by the Judge overseeing the litigation involving the RFP and subsequent protests. insideARM's May 3rd story about the TRO and Preliminary Injunction can be found here.  

Per the BuzzFeed article:

A crucial part of the student loan system — affecting tens of thousands of borrowers and billions in loan debt — has essentially ground to a halt, the bizarre result of a low-profile lawsuit against the Education Department.

"Essentially, the Court has shut down the Government’s defaulted student loan collection program," an Education Department lawyer said in a court filing.

On March 29, the judge issued a temporary restraining order that prevented any new defaulted borrowers from being assigned to debt collectors and put into rehabilitation programs. Instead, the borrowers have piled up inside the department's system, waiting.

The Education Department and the Justice Department are partly to blame for "unnecessarily" throwing a wrench into the entire defaulted loan system, one attorney with knowledge of the case told BuzzFeed News, because they've been unable to come to a resolution that allows the loan system to kick back into gear. "There's no fix in sight."

insideARM Perspective

The impact to consumers is real. If ED were a private company and had negatively impacted consumers in this manner two things would be happening. First, consumer right attorneys would be flooding the courts with class action litigation. Second, the Consumer Financial Protection Bureau (CFPB) would have Supervision and Enforcement attorneys camped out at ED offices investigating the situation. 

But, the impact to the individual student borrowers is not the only issue.  All taxpayers should be infuriated with current the state of affairs – and it is not just because of the litigation. There is a bigger issue.

Forgive the technical "inside ball" explanation...

From 2009-2014 ED contracted with 17 large (unrestricted size) companies and 5 small businesses to service the government student loan portfolio. In September 2014, ED increased the number of small business contractors from 5 to 11. In February 2015, via five 2-year contract extensions, ED reduced the number of large contractors from 17 to 5 (the other 12 unrestricted companies could work through their accounts in repayment, but did not receive any new placements). 

The result of the September 2014 increase and February 2015 decrease was this: After February, 2015 the mix of companies that received new placements from ED was 5 unrestricted size companies and 11 small businesses. However, since December 2016 the 5 unrestricted companies that had received ATE’s have not received new placements. All new placements have been going to the 11 small businesses. The 2-year extensions for the five companies have now expired, leaving the small businesses as the only ones eligible to receive new placements. Regardless, as outlined in the BuzzFeed article, ED is not placing new accounts with any company while the Preliminary Injunction is in effect.  

Meanwhile, the size of the student loan portfolio eligible for placement to the PCAs has been increasing.  

Editor’s Note: The numbers are a matter of public record on the Federal Student Aid (FSA) website here. From Q1 2016 to Q1 2017 the portfolio grew from $62 billion to almost $82 billion. This is complicated business and requires extensive training for the agents working the accounts. Yet, ED decided to REDUCE the number of PCAs to handle the work. 

Data from the FSA site presents an alarming story concerning total recovery dollars collected in relationship to the prior year’s results. This chart summarizes numbers comparing Q4 of 2016 with the prior year period and Q1 of 2017 with the prior year period.

When comparing Q4 of 2016 to the same period in 2015, recoveries are $165.3 million lower on .4148% (-7.41%) lower liquidation. For Q1 of 2017 compared to the same period in 2016, recoveries are $308.1 million lower on .3772% (-10.59%) lower liquidation. The recovery shortfall for Q4, 2016 and Q1, 2017 due to lower liquidation is $473.4 million. If you assume the average borrower has a balance of roughly $15,000, the number implies 30,000 borrowers remain needlessly in default. That is dramatic.

Given the uncertainty around the RFP and the litigation, these recovery numbers are expected to continue to deteriorate. At what point should taxpayers be angry? $1 billion shortfall? $2 billion shortfall?

Industry experts that insideARM has spoken to suggest that many of the 11 small businesses are struggling to work the current level of inventory. The placement volume to the small businesses is significantly higher than prior contracts. As a result, the investment required to handle the volume is much greater. When you consider the student loan portfolio is $1.4 trillion with $82 billion in loan defaults, one has to wonder what the right mix of small business and unrestricted agencies should be to manage the growing risk. Is 7 unrestricted agencies and 11 small businesses the right number in 2017 when there were 17 unrestricted and 5 small businesses that worked a smaller number of accounts in prior years? 

A settlement of the protests and litigation needs to happen sooner than later. The number of companies handling the work needs to be rationalized for the volume to be placed.