Student Loans: The ARM Industry's New Oil Well?

I just registered for next week’s Department of Education Private Collection Agency (PCA) meeting on October 26th and can’t wait to hear what they have to share. Why is this meeting so important to me? Because we are going to find out about the upcoming debt collection contract, slated for 2013.

While the Department of Education debt collection contract has been one of the most highly sought after contracts within the ARM industry for years, I believe it is now THE most sought after contract within this industry, centered within the most sought after market – Student Loans. And while I appreciate that many ARM business owners and executives already have their sights set on this market, here are three main reasons why I believe that the student loan market, and the Department of Education, will have the greatest impact on the ARM industry over the next 10 years:

• Total outstanding student loan debt has just surpassed $1 trillion (see Mike Bevel’s discussion of this in today’s ARM Insider) – That’s right $1 trillion, almost 20 percent more than the total amount credit card debt outstanding…and we all know how much of an impact the credit card sector has had on this industry over the past 10 years! Want to know the more relevant trending news? Over $100 billion in student loans was borrowed in 2010. $100 billion! And this number is still growing.

• Student loans cannot be discharged in bankruptcy – Not just Department of Education loans, ALL STUDENT LOANS! Yeah, I didn’t know that either but hey, somebody has to pay the bills.

• The Department of Education is taking over responsibility for all Direct Loan programs – bottom line, the business volume available to Department of Education vendors is going to continue to grow significantly over the next several years.

So why doesn’t everyone just jump in with both feet like they did into the credit card sector? Well, entering the student loan market isn’t easy because there haven’t been a lot of clients outsourcing loans for collection, and certain clients, particularly the colleges and universities, that do outsource have had pretty strict guidelines on how their debtors should be treated (think healthcare industry).

The vast majority of collection opportunities have been with state and federal government clients, private guarantors (like Sallie Mae), and private lenders (like large financial institutions). The private lending market has experienced a decline since the recession began, although business volumes have been picking up over the past 12-18 months. Private and state guarantors are seeing their volumes disappear as the Department of Education takes over market share.

So, what’s available today? Well, there are still large portfolios held by guarantors and private lenders, and the Department of Education’s portfolio isn’t getting any smaller. However, there are also a growing number of colleges and universities — including online and for-profit universities — that have collection needs including the issuance of their own credit to students. Many of these schools can no longer afford to offer students as much in scholarships, or write off loans that go unpaid, and the federal loan programs are not covering all of the costs.  This is where I see the potential opportunity for new entrants into the student loan market. The great part is once you gain a sufficient amount of experience collecting on student loans in the private sector, you may be able to obtain a sub-contracting relationship with an existing Department of Education servicer and ultimately win the contract.

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The student loan market is a $1 trillion opportunity for the ARM industry that is not going to decline anytime soon. And it produces debt that can’t be discharged in bankruptcy. While there are challenges in entering this market like any other, I am having a difficult time finding a reason why owners and executives would not strongly consider this market as a potential growth opportunity for 2012.