ED Suspends Recall of Defaulted Student Loan Accounts from ATE Holders

insideARM has learned that the five firms that had been notified that the accounts they’ve held under their 2015 Award Term Extensions would be recalled by July 3 received notice that the recall had been suspended.

Backing up a bit: In May four firms notified the Court of Federal Claims of their intention to protest ED's request to dismiss the case of FMS v. USA as moot. On May 25, 2018, Judge Thomas C. Wheeler granted the motion for dismissal and lifted the February 26, 2018 preliminary injunction that prevented ED from recalling in-repayment accounts.

Since that dismissal, ED did in fact send notice to the firms operating under 2015 Award Term Extentions (ATEs) notifying them that the government would be recalling their accounts on July 3. Those firms are FMS Investment Corp. (FMS), Account Control Technology, Inc. (ACT), GC Services Ltd. Partnership (GC), Continental Service Group, Inc. (ConServe), and Windham Professionals (Windham).

The companies subsequently requested a Temporary Restraining Order to prevent ED from recalling the accounts. Last Tuesday, June 26, the judge denied that motion for TRO.

Then this happened -- On Thursday, June 28, the Senate Committee on HHS, Labor, and Education approved the 2019 Appropriation, including the following:

Defaulted Student Loan Servicing. The Committee is concerned with the Department’s recent management of the defaulted Federal student loan process and with the capacity of current private collection agencies receiving new accounts to be able to properly serve borrowers who have defaulted on their loans. Accordingly, the Committee encourages the Department to extend current contracts with private collection agencies whose award term extensions are set to expire in April 2019, and that are affirmatively meeting all contract requirements, serving the fiscal interest of the United States, and complying with applicable consumer protection laws until the Department is able to transition to a new collections process as part of the Department’s Next Generation Financial Services Environment. Furthermore, the Committee directs the Department not to recall accounts that are not in repayment from such private collection agencies and allow them to continue servicing their current portfolio to avoid disruptions for borrowers, and to comply with the performance reporting requirements of the explanatory statement accompanying the Consolidated Appropriations Act, 2018.

Meanwhile, on Friday June 29, as an index to the Administrative Record in the case of FMS v. The United States (ED) and Alltran (now that they have intervened), the government filed the Report on Initial Observations from the Fiscal-Federal Student Aid Pilot for Servicing Defaulted Student Loan Debt. Originally filed in July 2016, this report details the initial findings from a two-year pilot program launched in February 2015 to compare the performance of efforts by the Department of Treasury and the Department of Education to collect defaulted student loan debt.

It’s a 30-page report including exhibits. The gist of it is that the Bureau of the Fiscal Service (Fiscal) at Treasury, which – pursuant to the Debt Collection Improvement Act of 1996 (DCIA) – collects and resolves delinquent, federal non-tax debts on behalf of most federal agencies (ED received an exemption from this Act), wasn’t as effective at collections as ED until it became more aggressive. Fiscal surmised that the significantly lower recovery rates they achieved were due to things like reduced call frequency, and a slower approach to the collection cycle in order to encourage voluntary borrower response, including the postponement of wage garnishment. 

And then we heard the news that the accounts are suddenly not being recalled. At least for now. Apparently there was little information provided.

insideARM Perspective

Although nobody knows exactly what ED’s proposed pre-default “enhanced servicing” will look like, it sounds to me that it may mirror some of the tactics tried by Fiscal to enhance the borrower servicing experience and encourage more voluntary action -- which unfortunately didn’t work so well. The recovery rate (.38%) was just a fraction of what was achieved by the control group of ED contractors (3.4%).

One might look at this and say the ED methods are too aggressive.

One might also look at this from the perspective of the taxpayer. Recovery rates of .38%-3.4%? Yikes. We certainly want to avoid borrower abuse, but it seems to me that this abuse started many years before, with the granting of loans – and the cost of an education – that are completely out of whack with the salaries available to be earned. WHY IS THE DEPARTMENT OF EDUCATION NOT FOCUSING ON THE ROOT CAUSE HERE…the absolutely ridiculous cost of a college education, compared with the ability to repay the required loans on the average salary of a college graduate?

Meanwhile, this is having a real impact on companies and individuals. Several of the companies that have sued the government over the unrestricted contract for private debt collection services have said that maintaining the capacity to take on the work, and then sustaining themselves throughout the lengthy and on-going litigation, has been a hardship.

The Dallas Business Journal reported recently that ACT will be laying off 72 employees from its San Angelo, Texas call center, and another 100 from its facility in Dallas. The company reported that this is directly related to the Department of Education contract loss.

I suspect we will see additional layoffs and/or mergers among some of these businesses that relied heavily on this contract. With that said, I also suspect that the 11 small business contractors and the two firms with 2017 ATEs may have a need to hire.