We have officially come to the end of an era. The Ministry of Education’s debt collection contract has ended. Big business, small business, all of them. According to sources, in a meeting yesterday with the other private collection agencies (PCAs), all accounts were recalled and contracts were terminated. This ends a decades-long chapter that included the rise and fall of businesses and jobs, and which was fraught with shifting policies, litigation and controversy almost from the start.
A little history
In 2012, insideARM published an article titled The Big Issues: Student Loan Collections. One of the articles Included in the feature was Don Taylor, then senior vice president of sales for Array Services Group, Inc. He described the turning point of 1993 and its effect on student loan collections.
“The Omnibus Budget Reconciliation Act of 1993, which included wording that had previously been 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 whose loans date back to the 1960s have been contacted to repay or face the AWG.
Taylor also shared insight into the relationship between the Department of Education (ED) and private loan collectors, and the evolution of ED policies.
“For over 20 years, ED has consistently monitored private collection agencies (PCAs) to ensure contract requirements and volume of complaints are met. At the same time, ED has modified or facilitated changes in its policies and procedures, which often benefits the student borrower. Although some of them are mandated by changes to the HEA, ED effectively manages the program by balancing the needs for borrower assistance and the collection of debts owed to the federal government.
A key provision implemented by ED on their PCA contracts several years ago was to reward borrowers with the waiver of the balance of collection costs in the event of successful rehabilitation. In most cases, the amount forfeited would be greater than the total of nine monthly payments to qualify for the program. This incentive to complete the rehabilitation often saves borrowers hundreds to thousands of dollars.
Today’s student loan borrowers who default on their loans have more repayment options than ever before. However, the only action most student borrowers could do to help themselves is to proactively and early communicate to their schools, lenders, or service providers.. There can be consequences for missed 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 monitored the renewal process for 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 ED 2009 contract for debt collectors ended. New small business contracts have been awarded on time, but the contracts for large companies have been delayed. More than 40 major collection agencies have entered the two-phase process. After ED made its initial cut, formal protests were launched by some of the companies that did not reach phase two. In general, the protests challenged the selection criteria. Finally, in December 2016 contracts were awarded to seven large companies (against 17 on the previous contract). This led to dozens of protests from companies who thought the process was flawed and unfair.
So began Chapter 2 material, with a VERY LONG “Redo” the solicitation, which lead to awards to only two large companies, in January 2018.
This led to chapter 3, with more protests, more disputes, and finally … nothing. No rewards for large companies at all. May 3, 2018 ED canceled all solicitation, canceled the contract awards of the two companies and recalled the accounts still in progress by the companies which had an extension of the award period (ATE) of the previous contract. There were more protests and a temporary recall injunction, but ultimately the protests were dismissed and the accounts 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 spoke out in favor of APCs, and continuously directed ED to cancel the solicitation – at least on the basis of the current administrative record.
Chapter 5 started in October 2018, jumping to a new protest on a different contract, initially unrelated but apparently very closely related – that of NextGen maintenance. The same company that led the latest round of litigation, FMS, filed the first protest against NextGen Phase II, claiming that ED unfairly altered the nature of the solicitation and excluded CPAs from the opportunity to compete. In addition, he introduced the idea of “inappropriate grouping” (see note below * for definition).
Finally, on August 1, 2019, the door was closed to 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 full but succinct summary of the years-long legal battle, Judge Wheeler of the Federal Claims Court spared neither party in his consideration of the arguments – or lack thereof – as he put the case to bed.
* What is an inappropriate grouping? Office of Management and Budget (OMB) Circular A-129 describes two separate regimes for servicing loans and collecting debts. Federal law requires that PCAs be compensated by contingency fees. The loan service is paid for by appropriation of Congress. The bundling of loan management and default collection services creates an internal conflict of interest for any beneficiary, as there is a natural incentive to shift work to that service which offers the highest pay structure.
Then there was the Covid
When Covid hit, the CARES Act instituted a payment break and interest waiver for federal student loans (details are here). Some have argued that this is not the right tool to use across the board, because while many jobs have been lost due to the pandemic, many have not either, and it has been asked whether these people should get a free pass.
This free pass has now been running for almost two years. And that had the effect of shutting down (or drastically reducing) most of the collection contract PCAs. The final take was withdrawn yesterday.
What is happening now?
FSA COO Richard Cordray said the collection of delinquent loans would now be handled by the five contractors hired last year to provide customer support, according to the Wall Street Journal. He said the change would have little effect on borrowers due to the current payment freeze.
insideARM point of view
We’ll be watching to see how it all plays out. There are currently 9 million borrowers with delinquent student loans. It’s a big bunch of accounts.
It seems reasonable that, for borrowers, ultimately dealing with a single provider – even in the event of default – would be helpful. However, the practice of providing customer service is quite different from the knowledge, practices and regulations associated with collecting bad debts. I believe at least one of the contractors is licensed as a collection agent. I suspect others will need to be as well to handle the volume of accounts. (So … does that mean there is still a private debt collection program?)
ED has argued for several years that a softer, more frequent touch would be all that is needed to keep borrowers from defaulting. Professionals in the industry can tell you that no matter how friendly they are, consumers with past due debt don’t rush to their creditors looking to settle, arrange, or generally be. communicative.