U.S. Department of Education to End Contracts with Several Private Collection Agencies
Posted By Abby Perkins on March 30, 2015 at 10:35 am
After years of public criticism and pressure from lawmakers and advocacy groups, last month, the Department of Education terminated contracts with five of the 22 private, for-profit collection agencies it uses to recoup past-due student loans. Coast Professional, Enterprise Recovery Systems, National Recoveries, Pioneer Credit Recovery, and West Asset Management were found to be intentionally and consistently misleading borrowers about the specific terms of a loan rehabilitation program, an option available to borrows in default who make nine timely payments over a 10-month period.
Hundreds of phone calls between the collection agencies and borrowers were monitored, producing evidence that the collectors were making false promises of the possibility of credit repair and the waiving of collection fees if the loans in default were paid. The Department also discovered that the collection agencies were withholding helpful information about flexible debt relief programs, inflating payments and garnishing wages. Some debtors were even harassed after their loan obligations were fulfilled.
Profiting from student loans
As the American Federation of Teachers points out, there’s big money in student loans. The Department of Education handles $744.3 billion in direct student loans, pays out more than $1 billion each year to collectors, whose job it is to track down borrowers who have defaulted on those loans. This conflict of interest is a common issue pointed out by advocates of students. While the Department of Education wants to help students find manageable solutions to debt repayment, the profit-driven collection agencies are incentivized to “prioritize collection over student welfare.”
Speaking to the Washington Post, Persis Yu, a staff attorney at the National Consumer Law Center who works on the Student Loan Borrower Assistance Project, made the point: “It’s really interesting that [the Department of Education] is singling out companies that beforehand they were calling top performers. Now they’re saying they had really unacceptable levels of misinformation. It calls into question the way they evaluate and compensate their debt collectors.”
Pioneer Credit Recovery has worked with the department since 1997, claiming earnings of $65 million in 2014 alone from recovering past-due student loan payments. Had the Department not terminated the contract, Pioneer estimated that their 2015 earnings might be as high as $48 million.
In 2014, Yu co-authored a report that showed that the higher the amount of money debt collectors recouped in student loan payments, the higher they scored and the more money they received from the Department of Education. Pioneer was one of the highest scoring collection agencies in Yu’s report.
Taking back the reins
The Treasury Department has launched a pilot program to determine if student loan collection services are better served with in-house oversight than by for-profit, third-party contractors. In the interim, the Department of Education has reassigned the rehabilitation loan accounts of the five terminated agencies and has promised to monitor them for compliance and fairness.
The Department has vowed to “issue enhanced guidance to all remaining private collection agencies, increase internal training for FSA staff, enhance the private collection agency manual, expand monitoring for these types of issues, and refine its internal escalation practices.”