The Department of Education is currently in the process of choosing the next group of companies that will collect student loan payments and debts on its behalf. The relationship between government-compensated student loan debt collectors and loan borrowers has been the focus of both consumer and debt collector advocates. According to Persis Yu, director of the Student Loan Borrower Assistance Project, “Right now the incentives are much more aligned with who is going to collect the most money. That’s a very appropriate model for debt collection, but that’s not appropriate for student loans.” As the Department of Education grapples with this decision, outstanding student loan balances have reached $1.3 trillion. The companies chosen by the government to assist with collection will have a great effect on consumers and more must be done to help struggling borrowers.
The student loan debt collection industry collected more than $2.2 billion for the government in the last three months of 2015 alones. Private debt collectors made approximately $1 billion in commissions in 2014. While the government offers many programs to assist with federal student loans, if a borrower defaults the consequences are extremely damaging to the borrower’s financial health. Credit reports are tarnished by the default and unlike private lenders, the government may garnish wages without a court order.
There is a push from consumer advocates to encourage debt collectors to work with borrowers to make their accounts current. They argue that since the government and its debt collection companies should properly explain the rights available to consumers as federal loan borrowers. The Department of Education has implemented successful changes in the past to encourage consumer-friendly debt management and collection practices. In 2012, the government changed the incentive structure for debt collectors so they would receive full commission even if borrowers agreed to make rehabilitation payments that amounted to an insignificant percentage of their loans. This change has facilitated healthier relationships between debt collectors and borrowers.
The last contract that was awarded by the Department of Education occurred in 2009. Since April 2015, the only companies that have been awarded a new debt volume are Account Control Technology, ConServe, FMS Investment Corp, Windham Professionals, and GC Services. Several companies have filed formal protest challenges. According to senior vice president at the National Council of Higher Education Resources, Timothy Fitzgibbon stated that the collection industry is “frustrated with the long delay in awarding the new debt collection contract.” However, consumer advocates state question whether giving the debt collection business to so many private companies make the much needed government oversight too difficult. Jason Glick, an attorney at New York Legal Assistance Group points to “a much larger problem with these duties being outsourced in the first place without particularly clear rules other than they cannot violate the law.” Government oversight is important and necessary to ensure that the rights of borrowers are protected going forward.