Department of Education Ending Contracts with Five Student Loan Collection Agencies

Updated March 2, 2015, 11:50am EST

The U.S. Department of Education announced late Friday that it would “wind down” its relationship with five private collection agencies on its student loan debt collection contract that ED says were providing inaccurate information to borrowers regarding rehabilitations.

ED also announced that it will provide enhanced Fair Debt Collection Practices Act (FDCPA) and Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) monitoring and guidance for all private collection agencies still on the contract to ensure that companies are consistently providing borrowers with accurate information regarding their loans.

In a press release, ED said that a review of all 22 of its private debt collection contractors had revealed “unacceptably high rates” of misinformation regarding rehabilitations among five collection vendors: Coast Professional, Enterprise Recovery Systems, National Recoveries, Pioneer Credit Recovery, and West Asset Management.

The review, conducted by ED’s Federal Student Aid (FSA) office, found that agents of the companies made materially inaccurate representations to borrowers about the loan rehabilitation program. The five private collection agencies named were found to have given inaccurate information at unacceptably high rates about these benefits. In particular, the agencies gave borrowers misleading information about the benefits to the borrowers’ credit report and about the waiver of certain collection fees.

ED said that it will reassign accounts held by these five agencies. The agency will also increase monitoring to ensure that the students who began rehabilitation under the five private collection agencies will be treated fairly as they complete the rehabilitation process. The agency will issue enhanced guidance to all remaining private collection agencies, increase internal training for FSA staff, enhance the private collection agency manual, expand monitoring for these types of issues, and refine its internal escalation practices.

“Federal Student Aid borrowers are entitled to accurate information as they make critical choices to manage their debt,” said Under Secretary Ted Mitchell. “Every company that works for the Department must keep consumers’ best interests at the heart of their business practices by giving borrowers clear and accurate guidance.”

Last year, the Government Accountability Office (GAO) issued a report blaming massive problems in the ED rehabilitation program on a poorly-managed computer system upgrade undertaken by the Department. The GAO found that because of limited planning and oversight, ED was unable to provide most borrowers who completed loan rehabilitation with timely benefits for more than a year following the October 2011 upgrade of its defaulted loan information system. As a result, borrowers who made a good faith effort to rehabilitate their loans experienced delays in having the defaults removed from their credit reports and reinstating their federal student aid eligibility.

Although ED noted that the FSA review was initiated to “ensure that its private collection agencies were complying with the terms of the contract, which includes assurances that the agencies would not engage in unfair or deceptive practices and would comply with all applicable Federal and State laws,” there were no allegations of FDCPA violations in its press release.

The companies involved have said that they had no indication from ED that the move was imminent. The five collectors were notified of ED’s decision on February 21. All have been working with the Department and other officials to understand exactly what happened.

“We had no warning,” said Joel Kunza, EVP and ED contract administrator with National Recoveries. “We have been an excellent performer on the contract, in both performance scorecards and internal audits. We are keeping all of our options open right now.”

Similarly, Pioneer Credit Recovery said that it was “blindsided” by the notification. Navient, Pioneer’s parent company, also noted in an SEC filing Friday, “We are engaged with ED to learn more about their decision and address any questions or concerns they may have.”

The announcement is already making waves in national and local news, especially in areas that the five collection agencies call home.

Newspaper Buffalo News and TV station WGRZ are running pieces focused on potential job losses in the Buffalo area, headquarters to Pioneer Credit Recovery. WGRZ noted that as many as 400 jobs could be at stake, although the company said in a statement that it has plenty of work for all current employs.

Buffalo News was the first to get statements from Congressional members in the area, quoting Republican U.S. Rep. Chris Collins as saying, “They didn’t like that Pioneer was making it seem like they were the magnanimous one waiving the fee, when it was the DOE. That’s easily fixed. That’s not worth terminating a contract, in my opinion.” A spokesman for U.S. Sen. Chuck Schumer (D-N.Y.) said the Senator is “doing everything in his power to help.”

The procurement process for the new unrestricted debt collection contract is still ongoing. As of Monday morning, ED had made no update to the procurement documents to reflect the announcement Friday.

Last year, ED awarded spots to 11 collection agencies on the contract’s small business set aside. Two of the small business awardees, Coast Professional and National Recoveries, were among the five announced Friday.