We’ve officially reached the end of an era. The Department of Education private debt collection contract is over. Large companies, small companies, all of them. According to sources, during a meeting that was held yesterday with the remaining Private Collection Agencies (PCAs), all accounts were recalled and contracts were terminated. This brings to a close a decades-long chapter that included the rise and fall of companies and jobs, and that was fraught with shifting policy, litigation and controversy almost from the start.
Some way-back history
In 2012 insideARM published a feature called The Big Issues: Student Loan Collections. One of the articles included in the feature was from Don Taylor, then Sr. Vice President of Sales for Array Services Group, Inc. He described the watershed moment of 1993 and its effect on student loan collections.
“The Omnibus Budget Reconciliation Act of 1993, which included language that was previously introduced as the Student Loan Reform Act, significantly amended the Higher Education Act of 1965 (HEA). This legislative change affected the recovery of defaulted student loans by introducing loan consolidation and Administrative Wage Garnishment (AWG). The law also retroactively eliminated the statute of limitations for federally-guaranteed student debt. Borrowers with loans originated as far back as the 1960’s were contacted to repay or face AWG.
Taylor also shared some insight into the relationship between the Department of Education (ED) and the private loan collectors, and ED’s evolving policies.
“For the past 20 plus years, ED has always closely monitored the private collection agencies (PCAs) for adherence to the contract requirements and complaint volume. At the same time, ED has either changed or facilitated modifications in their policies and procedures often benefiting the student borrower. While some of these are mandated from amendments to the HEA, ED effectively manages the program balancing the needs to help borrowers and collecting on debts owed to the Federal Government.
One key provision ED implemented on their PCA contracts several years ago was rewarding borrowers with the waiver of the collection cost balance upon successful rehabilitation. In most cases, this would result in the amount waived being greater than the total of the nine monthly payments to qualify for the program. This incentive to complete rehabilitation often saves borrowers from hundreds to thousands of dollars.
Today, student borrowers who default on their loans have more options for repayment than ever before. However, the one action most student borrowers could do to help themselves is proactively communicate early and often to their schools, lenders or servicers. There may be consequences for missing payments, but borrowers who openly communicate ultimately have more options than those who do not.”
Some more recent history
From 2017-2019 insideARM closely covered the renewal process of the large PCA contracts. It was a debacle. It was so complicated that we divided it into chapters to try to make the details digestible.
Chapter 1 began in 2014 when the five-year 2009 ED contract for debt collectors ended. New small business contracts were awarded on schedule, but the large-firm contracts were delayed. More than 40 large collection agencies entered the two-phase process. After ED made its initial cut, formal protests were launched by some of the companies not making it to phase two. Generally, the protests challenged the selection criteria. Finally, in December 2016 contracts were awarded to seven large companies (down from 17 on the previous contract). This led to dozens of protests by firms that believed the process was flawed and unfair.
This led to Chapter 3, with more protests, more litigation, and finally... nothing. No large company awards at all. On May 3, 2018 ED cancelled the whole solicitation, rescinded the contract awards from the two companies, and re-called the accounts still being worked by the firms that had an Award Term Extention (ATE) from the previous contract. There were more protests, and a temporary injunction of the recall, but ultimately, the protests were dismissed, and the accounts were returned to ED, thus ending Chapter 3.
…Which gave rise to Chapter 4 in June 2018, with eight companies protesting the cancellation of the solicitation, arguing that it was irrational. This chapter ended on Friday afternoon, September 14, 2018. Judge Wheeler ruled in favor of the PCAs, and permanently enjoined ED from cancelling the solicitation – at least based on the current Administrative Record.
Chapter 5 began in October 2018, by jumping to a new protest over a different, initially unrelated but apparently very related contract – the one for NextGen servicing. The same company that led the last round of litigation, FMS, has filed the first protest regarding Phase II of NextGen, claiming that ED has unfairly changed the nature of the Solicitation, and excluded PCAs from the ability to compete. Also, it introduced the idea of “improper bundling” (see note below* for definition).
Finally, on August 1 2019 the door closed on any chance for large private collection agencies (PCAs) to compete directly for a Department of Education (ED) contract for post-default debt collection services. In a comprehensive yet succinct summary of the years’ long legal battle, Judge Wheeler of the Court of Federal Claims spared neither side in his review of the arguments - or lack thereof - as he put the matter to bed.
*What’s improper bundling? The Office of Management and Budget (OMB) Circular A-129 describes two separate regimes for loan servicing and debt collection. Federal law requires PCAs to be compensated through contingency fees. Loan servicing is paid for through Congressional appropriation. Bundling loan servicing and default collection services creates an internal conflict of interest for any awardee because there is a natural incentive to shift work to that service that provides the highest compensation structure.
Then there was Covid
When Covid hit, the CARES Act instituted a payment pause and interest waiver for federal student loans (details are here). Some argued that this was not the right tool to use across the board because while many jobs were lost due to the pandemic, many also were not, and it was questioned whether those folks should get a free pass.
That free pass has now lasted for almost two years. And it had the effect of essentially shutting down (or severely shrinking) most of the PCAs on the collection contract. The final plug was pulled yesterday.
What happens now?
According to the Wall Street Journal, FSA chief operating officer Richard Cordray said collecting on defaulted loans would now be handled by the five contractors hired last year to provide customer support. He said the switch would have only a small effect on borrowers because of the current freeze on payments.
We’ll watch to see how this all plays out. There are currently 9 million borrowers with defaulted student loans. That's a big set of accounts.
It does sound reasonable that, for borrowers, ultimately dealing with one servicer -- even into default -- would be helpful. However, the practice of providing customer service is quite different from the knowledge, practice, and regulations associated with collecting defaulted debt. I believe at least one of the contractors is licensed as a debt collector. I suspect others will need to be as well in order to handle the volume of accounts. (So...does this mean there actually still is a private debt collection program?)
ED has argued for several years that a softer and more frequent touch would be all that’s needed to keep borrowers from defaulting. Those in the industry can tell you that no matter how friendly they are, consumers with past-due debt do not flock to their creditors looking to settle up, make arrangements, or generally be communicative.