Student Loan Bill Could Drastically Alter Education ARM Industry

Congress is slated to debate a bill today that would fundamentally change the student loan industry. The “Student Aid and Fiscal Responsibility Act of 2009” proposes changes to Federal student loans that would impact independent debt collection agencies, borrowers and institutions of higher education across the country.

Under the bill, which was passed out of the Education and Labor Committee in July by a 30 to 17 vote, after July 1, 2010 all Federal student loans will be placed under the Direct Loan Program. In effect, the bill would kill the popular Federal Family Education Loan Program (FFELP). The new student loan system would remove the middle men in loan servicing and collection, making the Department of Education (ED) creditor, processor, servicer, and collector of all Federal student loans.

The U.S. House is scheduled to debate the bill Thursday, with a vote possible by Friday.

The switch to the Direct Loan program will also alter the current Perkins Loan program, changing it to the Federal Direct Perkins Loan Program, which will create a new form of direct loan modeled after the government’s current unsubsidized Stafford Loans, with interest rates capped at 5 percent.

It is thought that the changes to the Perkins Loan program – a program that provides campus-based low-cost Federal Loans to students who demonstrate financial need – will ultimately benefit the education system and students by expanding total loan volume under the plan from $1.5 billion per year to $6 billion per year.

“We strongly support expanding the Perkins Loan program to make loans available to more students at more schools,” said Robert Perrin, president of the Coalition of Higher Education Assistance Organizations (COHEAO).

But a wholesale shift to exclusively government loans could lead to massive job losses for many workers in the space.

Perrin, also the president of accounts receivables management firm Williams & Fudge, told insideARM that their research showed “potential job losses of between five and 10 thousand jobs among [collection] agencies, billing servicers and campus employees.”

In an interview with NPR Thursday morning, Jeff Noordhoek – president of student loan provider NelNet – said that job losses in the industry could reach 35,000.

Perrin noted that relationships that have been developed between students, collection agencies, billing servicers and schools will be lost when ED takes over. “The loss of a personal touch is a detriment to student borrowers,” he said.

“Schools will only be involved with downloading funds from the Department of Education, and then determine which students are eligible for those funds and disperse accordingly. That’s where it ends. All servicing and back door operations on campuses, and all the collections will be done under ED and entities they contract with,” Perrin said.

Don Taylor, president of Account Control Technology, Inc., a collection agency that is currently working for ED, told insideARM that his firm supports a mixed marketplace. “We support choice in student lending, which we believe is best for the borrower,” he said. “The Perkins program has been a successful program for more than 40 years and we see no need to change a successful program.”

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Collection agencies that are not contracted with ED will eventually lose business, according to Perrin. Stipulations in the bill give schools an ultimatum: they can either maintain their existing portfolios and as money is collected, transfer everything but the percentage that was matched back to the federal government or they can sign all of their accounts over to the Department of Education. There will eventually be a depletion of the loans, which will lead to an end in Perkins Loan collections for collection agencies that are contracted with individual schools.

“The industry is losing a major piece of the collection business which is the Perkins student loan program, or for those who do FFELP loans, which includes subsidized and unsubsidized Stafford Loans as well as Perkins,” said Perrin. “That’s a major share of their business so that’s definitely going to influence the higher education collection market and result in some major changes.”

There is talk of more collection agencies being added to the contract with the ED, but no one knows if that will happen, when it will happen or how many agencies will be added. insideARM could not reach ED for comment before publication.

“When talking about the industry as a whole, for those whose primary business is higher education collections, as things shift it is a major reduction in their loan portfolios,” said Perrin. “It takes a tremendous amount of capital if you want to consider a federal contract down the road, so I think there’s going to be a lot of smaller agencies that won’t be able to participate, and won’t have those same opportunities, so that hurts the small business person.”

COHEAO opposes the bill on other grounds as well. The organization says the bill will charge Perkins loan borrowers interest while they are still in school, instead of starting to charge interest after graduation. The organization claims that the new program’s cancellation benefits will mirror unsubsidized loan cancellation benefits, which will be more burdensome on low income students.

Harrison Wadsworth, executive director of COHEAO said, “The bill is not as student friendly as preferred by COHEAO.”

Perkins loans have been a low-cost source of financial aid for financially needy students since 1958. The current Perkins Loan program has had a default rate of 5.5 percent.

In a letter of support and concern to Education and Labor Committee Chairman George Miller (D-Calif.), the sponsor of the bill, Charles L. Currie, SJ, president of the Association of Jesuit Colleges and Universities — an association representing 28 institutions – noted, “This bill presents a great opportunity to assure and address more access for students over the next ten years. We do need to resolve, however, the issue of Perkins Loan in-school interest rate subsidies, and we look forward to continuing to work with you and your staff to achieve a fair solution for students and institutions.”

COHEAO is encouraging concerned parties to join their National Call-In Days to call Members of Congress and let them know their thoughts on the new Perkins Loan proposal. The Call-In days are scheduled for Thursday and Friday (September 17 and 18). To find a member of congress, visit http://www.visi.com/juan/congress/index.html.

Editor’s Note: An earlier version of this story mischaracterized quotes from Don Taylor of ACT. The corrected quotes appear in the final version of the story.