ED Data Shows 109% Increase in Student Loan Defaults Over Last 4 Years; Says Small Businesses Can Handle

Last Friday we learned that U.S. Court of Federal Claims Judge Thomas C. Wheeler granted the Department of Education's (ED) motion to dismiss the case of FMS v. USA as moot. Read about that here. ED claimed the case was moot because it cancelled the Solicitation for unrestricted private debt collection services that were the subject of the protests. 

As justification for the cancellation, the Government offered two key points:

1. It has plenty of capacity to handle the volume of defaulted consumer accounts just by using the small business contractors who had already received an award to service defaulted student loans in October 2014.
2. It is planning a new strategy to head-off defaults by having servicers (companies like Navient, Nelnet, Great Lakes Educational Loan Services, and FedLoan Servicing) get more involved up front.

Last August, Federal Student Aid Fund (FSA), the part of ED that manages federal student loans, also cancelled a Solicitation for servicers and announced its "Next Generation Processing and Servicing" (NextGen). This marked the beginning of a major shift by ED in the way it expects to service its loans -- from beginning to end. At the time, Dr. A. Wayne Johnson, who is running the NextGen program, said: 

“The FSA Student Loan Program represents the equivalent of being the largest special purpose consumer bank in the world. To improve customer service, we will take the best ideas and capabilities available and put them to work for Americans with student loans. When FSA customers transition to the new processing and servicing environment in 2019, they will find a customer support system that is as capable as any in the private sector. The result will be a significantly better experience for students – our customers – and meaningful benefits for the American taxpayer.”

The 2019 date appears to be timed to coincide with the expiration of the current servicer contracts (these are the ones that were the subject of the new Solicitation that was cancelled in conjunction with the NextGen announcement).

In addition to getting all servicers on one platform (the Navients, Nelnets, etc.), industry experts noted that the system design revealed in December 2017 included a default management module as well. It seemed, though, that this module would be years away from becoming a reality, as it hasn't yet been the subject of a technology solicitation.

Protesting collection agencies claim three things in relation to all of these changes:

1. This is a huge project, to say the least. It seems unlikely that ED's timeline will not experience delays.
2. Increased efforts in the past to prevent default have not worked, so without additional details it's difficult to conclude the future would be any different.
3. The data shows that the number of students in default has increased by 109% from Q4 2013 to Q4 2017, so it seems improbable that the existing small business contractors could handle the volume.

Here is what ED's data shows:

This data shows that from Q4 2013 to Q4 2017 there was a 28% increase in the number of borrowers in the total direct federal student loan program. The same period brought a decrease of 14% in students in (or just out of) school, a 57% increase in the number of borrowers in repayment, a 24% increase in those in forebarance or deferment, and a 109% increase in the number of those in default. This is the period during which the 2009 unrestricted contract for private debt collectors expired. The 2014 award increased the number of small business contractors, but five large agencies also received extensions -- and all had been receiving accounts until an injunction in May 2017.

The large collection agencies that are now expected to file a new bid protest will say, in part, that ED's decision to cancel the Solicitation for unrestricted private debt collectors flies in the face of logic, given the drastic increase in the number of defaulted accounts, even with the increase in small business contractors.

Meanwhile, the Washington Post reported last Friday that ED expects to have the servicers handle the specialized function of default management. I suppose anyone can learn anything but many will tell you that managing past due accounts is quite different than sending statements, processing payments and answering questions on inbound calls.