ED’s Pending PCA Small Biz Set Aside: More Litigation?

As the industry waits for news this Friday from the Department of Education (ED) regarding next steps in the unrestricted private debt collection contract litigation, another story has emerged.

A source familiar with what’s happening in this space reports to insideARM that ED recently signaled its intent to hold another procurement for Private Collection Agency (PCA) services in the months ahead – one set aside for small businesses – that could lead to even more litigation.

The recently-disclosed procurement plans are cited within a spreadsheet available for download on a page of ED’s website about forecasted contract opportunities.  The file is dated January 23, 2018, and indicates a procurement for default collection services is planned to begin during the Federal third quarter.  For those unfamiliar with Federal accounting practices, that’s this quarter.

Before anyone assumes the news will usher in a new round of restraining orders filed by jilted contractors, it’s no surprise why a set aside procurement would be in the works at ED, since there are reasons why one would be necessary.  Work has been partially set aside for small businesses since 1997, and contracts let to small businesses by ED are historically not as protest-prone as those let on an unrestricted basis.  Today, PCAs hired as small businesses are doing the lion’s share of all default collection work for ED.

“People should keep in mind, the Federal government has no large business spending requirements,” stated Nick Bernardo, a principal at Fed Cetera, a business development organization serving collection agencies that seek Federal work, continuing, “The Federal government only has small business spending requirements.”

This of course alludes not only to the government-wide mandate for Federal agencies to spend 23% of all contracting dollars with small businesses, but also to ED’s agency-level goal, which stood at 25.5% in Federal fiscal year 2016, the last year for which final performance data is available.  That year, ED missed its mark, achieving 23.35% of spending with small businesses to go with a “C” rating, according to data within a report available on the Small Business Administration (SBA) website. 

The same report’s comment section indicates ED, “remains dedicated and committed to small businesses and is actively engaged in outreach, training, advocacy, and strategic partnering. The Department has strong support and collaboration of our senior leadership, and will continue to strengthen our program, even in the face of programmatic challenges.”

One can infer these comments relate at least partially to the PCA program, since, according to the Federal Small Business Dashboard, unofficial tallies for Federal fiscal year 2017 show small business PCAs accounted for more than 55% of $657 million in direct small business spending at ED last year, and more than 15% of $2.4B in total ED spending during the same period.  And this in a year when the U.S. Court of Federal Claims cut off new work for eight months, beginning with the last five months of that fiscal year.

In that sense, small business PCA utilization is part of ED’s strategy to meet dual needs: to properly service defaulted student loan borrowers on one hand, and to meet its small business utilization goals on the other, which ED would simply not meet without setting some PCA work aside for small business. 

Because more than a handful of large businesses now in litigation with ED over the unrestricted procurement were originally awarded contracts set aside for small businesses when they themselves were small, it could be argued ED could not meet its overall defaulted student loan needs without using set aside contracts as a proving ground for small businesses that ultimately “grow up” and take on much larger volumes of work that needs to be done.

The law of unintended consequences being what it is, the centralization of Federal student loan lending since 2010, plus mandates for ED to use small businesses as prime PCAs and as subcontractors to prime PCAs, has created a large pool of small businesses now qualified to do the work.

But why wouldn’t the current field of eleven small businesses simply keep shouldering the load of servicing borrowers and helping ED meet small business goals, you might ask? Small business contracts awarded in 2014 were awarded as “long term contracts” in Federal parlance, which subjects them to regulations requiring Federal contracting officers to request “that a business concern recertify its small business size status no more than 120 days prior to the end of the fifth year of the contract, and no more than 120 days prior to exercising any option thereafter.” (78 Fed. Reg. 61114 [Oct. 2, 2013])

Industry insiders are speculating that very few, if any, of the current eleven small PCAs may be able to recertify as small businesses when the time comes.  This means ED can’t take credit for small business spending after that unless they do something, like hire more small businesses.

Companies able to compete for new small business awards are just as numerous as those still competing for the unrestricted awards now held up in litigation. The field includes up to a few of the current eleven small PCAs, numerous current small business subcontractors, many former small business subcontractors to unrestricted PCAs that stopped receiving new work since 2015, newly-formed companies with owners who have decades of ED experience, and possibly a few formerly-large PCAs that may have fallen under the size standard for collection agencies because they stopped receiving new work from what had been their largest client in 2015. That’s to say nothing of many other firms that have not done this work in the past yet have lots of higher education experience, and any number of other would-be competitors.

Since ED’s the only game in town, this sets up a potential for a repeat of what has transpired with unrestricted contracts over the past few years.  The sheer number of qualified bidders, plus the fact that the very existence of so many potential bidders rides on doing this work, portends a high likelihood of more protests, and more litigation, unless ED can devise a strategy to avoid it.