U.S. Gov't to Test In-House Student Loan Debt Collections, Cutting Out Private ARM Firms

The U.S. Treasury Department is readying a pilot program to take over the collection of some defaulted student loan accounts from the Department of Education, essentially removing the work from contracted private debt collection agencies.

There is no official confirmation of the program yet, but multiple unnamed sources within ED and Treasury have discussed the plan with numerous media outlets. The Huffington Post had the story first and The Wall Street Journal independently verified some of the information.

According to media sources, the plan would involve moving defaulted student loans to Treasury’s fiscal service bureau. The intent is to put more focus on helping struggling borrowers, most likely in the form of rehabilitating defaulted loans into current status.

It is unclear whether the initial loans would involve more recent direct federal loans or legacy guaranteed loans, or a combination of the two. Currently, ED contracts with private debt collectors to recover defaulted loans.

There is also a separate plan to do the same with student loans that are current. ED also uses private companies to service those loans under a separate contract.

The internal debt collection pilot program could begin early next year, according to sources.

Although there has been no official confirmation, at least one member of the Administration recently acknowledged that federal agencies are concerned with some of the incentives in the debt collection contracts.

Deputy Treasury Secretary Sarah Bloom Raskin said at a National Consumer Law Center conference last week that incentives embedded in the debt collection contracts may not align with an Education Department goal of rehabilitating defaulted loans to current.

“Federal student loan debt collectors need to be encouraged to remove loan accounts from default when possible, as well as deal fairly with borrowers, and the incentive structures in debt collector contracts should convey these priorities,” Raskin said in a prepared speech.

Raskin’s main objection was in the scoring of performance in the contract. Private debt collection agencies are scored based on a range of criteria, and the scores determine how much additional work each agency receives in the next scoring period. Raskin noted that the largest emphasis for performance scores is total dollars collected.

Although there has not been an update in the scoring methodology used to rank private collectors, the terms of the contract have already changed with regard to collection agency compensation.

ED awarded debt collection contracts on its small business set aside last month. The contracts signed by the 11 small business contractors allowed for a flat fee paid for rehabilitations, a departure from the previous contract that called for a commission on rehabs based on the value of the account. The new contract also awards a flat rate three times higher than the previous one for administrative resolutions (situations where collectors remove the account from default status based on certain events, like death or bankruptcy).

In addition to the changes in flat rate compensation, topline commission rates for dollars collected are lower in the new contract. So emphasis has been shifted, at least somewhat, from total dollars collected to more of a servicing and outcome-based model.

The awarding of that small business collection contract presents some issues for the planned Treasury pilot. While the unrestricted contract has yet to be awarded, there are 11 small business collection agencies that have signed on the dotted line. What happens to those contracts if the Treasury moves forward?

The Huffington Post article noted that the entire pilot plan “would be contingent on Congress providing necessary funding,” a feat that may have long odds with a shift in Congressional power slated to take effect in January.