We have officially come to the end of an era. The Department of Education’s private debt collection contract has been completed. Big business, small business, all. According to sources, in a meeting held yesterday with the remaining private collection agencies (PCAs), all accounts were recalled and the contracts were terminated. This ends a decades-long chapter that included the rise and fall of businesses and jobs, and which was fraught with the pitfalls of shifting policies, litigation and controversy almost from the start.
A bit of history back
In 2012, insideARM published an article titled The Big Issues: Student Loan Collections. One of the items included in the feature was from Don Taylor, then senior 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 previously introduced as the Student Loan Reform Act, significantly amended the Higher Education Act of 1965 (HEA). This legislative change affected the collection of delinquent 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 dating back as far as the 1960s have been contacted to repay or deal with AWG.
Taylor also shared insight into the relationship between the Department of Education (ED) and private debt collectors, as well as the evolution of ED policies.
“Over the past 20+ years, ED has consistently monitored private collection agencies (PCAs) for compliance with contractual requirements and volume of complaints. At the same time, ED has changed or facilitated changes in its policies and procedures, often benefiting the student borrower. While some of them are mandated by amendments to the HEA, ED effectively manages the program by balancing the needs of borrower assistance and collection of debts owed to the federal government.
A key provision that ED implemented on its PCA contracts several years ago rewarded borrowers with the waiver of the balance of collection costs upon successful rehabilitation. In most cases, this would result in an amount waived greater than the total of nine monthly payments to qualify for the program. This incentive to complete rehabilitation often saves borrowers hundreds to thousands of dollars.
Today, student borrowers who default on their loans have more repayment options than ever before. However, the only action most student borrowers could take to help themselves is to proactively communicate early and often with their schools, lenders, or service agents.. There can be consequences for missing payments, but borrowers who communicate openly ultimately have more options than those who don’t.
A little more recent history
From 2017 to 2019, insideARM closely covered the renewal process for major PCA contracts. It was a debacle. It was so complicated that we broke it up into chapters to try to make the details digestible.
Chapter 1 began in 2014 when the 2009 five-year ED contract for debt collectors ended. New small business contracts have been awarded on time, but big business contracts have been delayed. More than 40 major collection agencies entered the process in two phases. After ED made its initial cut, formal protests were launched by some of the companies that did not make it to phase two. Typically, protests have challenged the selection criteria. Finally, in December 2016 contracts were awarded to seven major companies (against 17 on the previous contract). This led to dozens of protests from companies who felt the process was flawed and unfair.
So began Chapter 2 of the question, with a VERY LONG “re-doing” solicitationwhich lead to awards to only two major companiesin January 2018.
This led to chapter 3, with more protests, more litigation, and finally…nothing. No rewards for large companies. May 3, 2018 ED has canceled the entire solicitation, canceled both companies’ contract awards and recalled accounts still being performed by the companies that had an award term extension (ATE) from the previous contract. There were more protests and a temporary recall injunction, but ultimately the protests were overruled and the accounts were returned to ED, effectively ending Chapter 3.
…which resulted in Chapter 4 in June 2018, with eight companies protesting the cancellation solicitation, arguing that it was irrational. This chapter ended on Friday afternoon, September 14, 2018. Judge Wheeler ruled in favor of PCAsand permanently directed ED to rescind the solicitation – at least based on the current administrative record.
Chapter 5 started in October 2018, moving to a new event on a different, initially unrelated but apparently very related contract – the one for NextGen maintenance. The same company that led the latest round of litigation, FMS, filed the first NextGen Phase II protest, claiming that ED unfairly changed the nature of the solicitation and excluded PCAs from the ability to compete. Also, he introduced the idea of ”inappropriate grouping” (see note below * for definition).
Finally, on August 1, 2019, the door closed on any chance for large private collection agencies (CPAs) to compete directly for a Department of Education (ED) contract for post-default debt collection services. . In a comprehensive but succinct summary of the years-long legal battle, Federal Claims Court Judge Wheeler spared no party in his consideration of the arguments – or lack thereof – as he put the matter to bed.
* What is inappropriate grouping? Circular A-129 from the Office of Management and Budget (OMB) outlines two separate regimes for loan servicing and debt collection. Federal law requires PCAs to be indemnified with contingency fees. Loan servicing is paid for through congressional appropriations. The bundling of loan servicing services and default recovery services creates an internal conflict of interest for any beneficiary, as there is a natural incentive to transfer work to that service which offers the highest compensation structure.
Then there was Covid
When Covid hit, the CARES Act instituted a payment pause and interest relief for federal student loans (details are here). Some argued that it was not the right tool to use across the board, because while many jobs were lost due to the pandemic, neither were many, and it was questioned whether these people should get a free pass.
This free pass has now lasted for almost two years. And that had the effect of essentially shutting down (or drastically reducing) most PCAs on the collection contract. The final plug was removed yesterday.
What happens now?
According to the Wall Street Journal, FSA chief operating officer Richard Cordray said collection of delinquent loans would now be handled by the five contractors hired last year to provide customer support. He said the change would have little effect on borrowers due to the current payment freeze.
We’ll be watching to see how it all pans out. There are currently 9 million borrowers with delinquent student loans. It is a large set of accounts.
It seems reasonable that, for borrowers, ultimately dealing with a single servicer – even in the event of default – is helpful. However, the practice of providing customer service is very different from the knowledge, practices and regulations associated with collecting bad debts. I believe at least one of the contractors is licensed as a debt collector. I suspect others will need to be too to handle the volume of accounts. (So… does that mean there’s still a private debt collection program?)
ED has argued for several years that gentler and more frequent contact would be all that is needed to prevent borrowers from defaulting. Industry pros can tell you that no matter how friendly they are, consumers with unpaid debts don’t flock to their creditors looking to settle, make arrangements or be generally communicative.