If Private Collectors Won't Be Handling Defaulted ED Loans in the Future, Who Will?

Last week in a joint announcement, First Data (NYSE: FDC) and Navient (Nasdaq: NAVI) announced they had reached a strategic agreement for First Data to become the primary provider of technology solutions for Navient’s federal and private education loans. As a part of the agreement, First Data will acquire Navient’s student loan technology platform. The deal is expected to close in the third quarter of this year.

According to the announcement,

"First Data is one of the world’s largest providers of credit processing services, with more than a billion accounts on file. This agreement will also position First Data as a major provider in the student loan technology market and allow First Data to further leverage its scale, technology, and deep experience on behalf of student borrowers. To reinforce First Data’s commitment to this space, First Data is establishing First Data Education, which will be led by Jeff Whorley. Jeff has been Group President, Asset Management and Servicing at Navient and will become a member of First Data’s Management Committee.

As one of the largest servicers of student loans, Navient will continue to provide its leading customer service, data insights, default prevention, back office support, and other services that have delivered a track record of customer success.

Navient will continue to service loans for its 12 million federal and private education loan customers, including those serviced under a contract with the U.S. Department of Education."

insideARM Perspective

This is significant not only because of the sheer size of both companies, but because of the timing. The Department of Education (ED) announced last year that it is building a "NextGen" system to manage its entire financial aid process. It is expected to be a "mobile first, mobile-complete, omni-channel environment."

Currently, the major loan servicers each use their own technology, so a borrower who has multiple loans may be dealing with multiple entities -- none of whom are currently able to see the full picture. ED's vision of the future is to have all servicers -- and all borrowers -- on a single platform, which should improve the customer experience significantly.

On October 20, 2017 insideARM reported that one of the primary servicers, Nelnet, announced its intentions to acquire another of the primary servicers, Great Lakes Educational Loan Services, Inc. The two companies had been working for some time on a project to develop a servicing platform which they call “GreatNet.” It was clearly developed with “NextGen” in mind; the GreatNet website currently states that it has been chosen as one of three finalists to provide the system for ED. I contacted GreatNet for background on where these "three finalists" might be publicly listed (and who the other two are) but they did not respond in time for publication.

This December 2017 diagram produced by ED illustrated the current loan servicing environment. The dark blue center section represented the area of focus for phase one of the NextGen project.

This February 2018 diagram illustrates a new enterprise-wide approach. Note that Private Collection Agencies (PCAs) are still represented, but the entire process is now encompassed in one box. Based on last week's dismissal of FMS v. USA, perhaps a new version of this diagram will reveal a debt management and collection system that does not also have a box with 9+ PCAs. In its Motion, ED argued that its needs for PCAs have changed, as it anticipates servicers to conduct more pre-default activities in order to prevent defaults.

The latest Solicitation includes ten components: A-I, plus an independent quality assurance support role. Although defaults are not specifically referred to, it seems the components relevant to debt collection are E and F, which cover "business process operations, to include direct customer contact (inbound/outbound) and processing operations." Component F is specifically described as supporting those activities which cannot be automated. A more detailed diagram states that "multiple awards [are] anticipated."

The majority of components E and F are currently slated to launch as part of milestone 3 (out of 4), with a target date of late 2019 or early 2020. Of note is that the Solicitation states, "FSA recognizes that it may take time to deploy Solution 3.0. FSA also recognizes that it may not be cost-effective to service some of FSA's older loans on Solution 3.0." It is unclear how many is "some," and whether these older loans are in default; some older loans do not have the same repayment options.

Dr. A. Wayne Johnson -- who was appointed Chief Operating Officer of Federal Student Aid (FSA) in June 2017, and then in January 2018 was named to lead a new ED unit called the Office of Strategy and Transformation -- is in charge of the project to build NextGen. Johnson has deep qualifications for the job, though for what it's worth, he was an executive vice president of First Data Corporation from 1992 - 1997 following its purchase of a company he founded. He has also worked at TSYS. Given their size, scope and experience, both of these companies could be serious contenders for a NextGen contract.

While having these firms on his resume might raise an eyebrow, I'll concede it would likely be challenging to find a professional who has the experience for Johnson's job at ED without having worked at any of the firms that are likely contenders for these contracts.

Finally, it will be interesting to see whether -- down the line, if/when servicers are responsible for collections -- the servicers are allowed to use subcontractors. Large PCAs may just be in the game again if they can hold out long enough.