In a rare win for student loan borrowers under the Trump administration, the Department of Education made public plans to eliminate the use of private debt collectors tasked with collecting federal student loan bills from borrowers who were behind on payments.
By eliminating private debt collectors from federal student loans, the task will fall upon the student loan servicers to retrieve payments from borrowers who continue to miss payments.
The private debt collectors were highly unpopular with many consumer advocates. According to one former policy advisor to the Obama administration, “Private collection agencies are expensive, not well incented to help borrowers, and complicate the process by taking defaulted students out of one system and putting them into another.”
The move comes following a letter from twelve Democratic Senators urging Secretary of Education Betsy DeVos to end the use of collection agencies for federal student loans.
In the words of one of the letter signers, Senator Elizabeth Warren:
“The Education Department’s contracts with private student loan debt collectors are a nightmare for student borrowers and a waste of hundreds of millions in taxpayer dollars. Many of these companies have a disturbing history of lying to student borrowers and breaking the law. It’s time for this gravy train to start coming to an end.”
Federal Debt Collection Costs
In addition to criticism for misleading borrowers, the federal debt collectors had also earned a reputation for being very expensive with disappointing results.
Analysis from the Center for American Progress, a think tank, found that the federal government spent over $700 million dollars last year to collect the debt from the less than 7 million borrowers in default. The $700 million figure is just under what the federal government spent to service all 33 million federal student loan borrowers.
Perhaps most damning for the debt collectors was a Consumer Financial Protection Bureau estimate that found that the federal government paid the debt collectors $40 for every $1 recovered from borrowers placed back into repayment.
Motivation for the Move
Secretary DeVos has not publicly commented on her motivation for the move, but the information become public in a court filing pursuant to a lawsuit regarding the debt collection company selection process.
Initially, over 40 companies bid on the debt collection contracts valued at potentially over $400 million. Many questioned the selection of Performant, a debt collection company with a disappointing track record and previous financial ties to Secretary DeVos. A number of companies that lost out on the contract sued.
Earlier this month, it was revealed that the two previously awarded contracts have been canceled. Attorneys for the Department of Education now claim the lawsuit is no longer relevant because of the change in debt collection procedure.
The sequence of events certainly suggests that the lawsuit from the debt collection agencies could have had an impact on the Department of Education’s decision to overhaul the debt collection process.
What Does this Mean for Borrowers?
Even if the motives behind the DeVos decision may have been less than pure, it still represents a potential step forward for borrowers.
By tasking the student loan servicers with collecting defaulted loans, borrowers who have fallen behind on their debt should hopefully have a less confusing process. Rather than working with a debt collection agency and then with a servicer, these borrowers will potentially deal with a single point of contact for the entire process.
A sketchy decision making process is always disappointing, but DeVos and the Trump administration should get credit for doing the right thing. Hopefully getting positive feedback for borrower friendly policies will encourage further borrower friendly developments.