Consumer Group Blasts ED Student Loan Collectors in Horribly Biased Report

Patrick Lunsford

The National Consumer Law Center (NCLC) late Tuesday published a report that calls for the Department of Education to stop using private collection agencies to help recover delinquent student loans. But the report is misleading and inflammatory, going far beyond more reasoned studies from government agencies urging reform within the ED collection contract.

The report, “Pounding Student Loan Borrowers: The Heavy Costs of the Government’s Partnership with Debt Collection Agencies,” focuses primarily on the commissions paid to debt collectors, the lack of transparency within ED concerning the contract, the loan rehabilitation program, and the legal issues of one contractor, NCO Group, which for the period of the report was the largest ARM firm in the world.

Under the subheading The Collection Agency Contractor System Costs Billions, NCLC authors write, “The costs of relying on private collectors are enormous for borrowers, taxpayers, and society.” That cost, at least to taxpayers, is quantified by noting that ED is projected to pay over $1 billion to the 22 collection agencies on the contract in FY2014.

That figure is repeated under a sub-subheading Outsourcing Collection Is Not Cheap, and it’s noted that ED projects commissions to exceed $2 billion by FY2016. It’s in this section where the NCLC elaborates on how, exactly, the collection agencies got such high commissions.

Oh wait, no they don’t. In fact, that’s all they say on the matter. They leave the impression that it costs taxpayers and borrowers $1 billion to administer the program with no mention of how much the collection agencies recover for the government. And just so we’re clear on the authors’ intent, they again cite the figure in a call-out box which reads, “Private student loan debt collectors are projected to receive over $1 billion in commissions in 2014, paid by taxpayers and student loan borrowers.”

Nowhere in the report — not in the prose, footnotes, or appendices – does it state in aggregate how much collection agencies recovered for ED, the ostensible basis for the commissions.

Fortunately, Huffington Post provided a link to a footnoted source in the NCLC report (a link that was not included in the report) that noted in FY2013, collectors were paid $819 million in commissions against $8.65 billion in collections. And, indeed, ED projects that it will be paying its contractors more than $2 billion in commissions in FY2016, but it expects its collection contractors to bring in $16.9 billion that year.

The report spends a lot of time discussing ED’s loan rehabilitation track within the default management group. In fact, that track was the focus of a Government Accountability Office (GAO) report published in March that found “a major computer system upgrade with ED’s debt management division was so poorly managed, it led to months-long delays in loan rehabilitations.” That report also noted that ED was not effectively monitoring private debt collection agency performance on the contract. It made a number of sensible recommendations, to which ED concurred.

But the NCLC report focused on past behavior of collection agencies with regard to rehabilitations to paint a picture of greed among the companies. The report even noted that the egregious behavior was corrected when ED changed its commission structure in July 2012 and made a change to the contract itself the following year. In other words, the problem was identified and solved, but the authors felt the need to use it as an example of how greedy and dangerous collectors can be.

As for the focus on NCO’s unrelated legal issues, what can we say? All of those enforcement actions and settlements happened, and NCO is on the contract. But what isn’t noted is that the company makes (made, perhaps) the most calls of any other firm chasing debts in the U.S., so they have the most exposure. Also not noted: none of the actions pertained to NCO’s involvement with the student loan collection contract.

On the final point of focus of the report, ED’s lack of transparency regarding the collection contract, I whole-heartedly agree with NCLC.

I’ve been covering this contract for a decade. When we first started reporting on it, I thought it was an extremely transparent program. Collection agency performance results were published publicly on an ed.gov site. Even when that stopped, ED officials would send me copies of the reports. When that stopped, many of the contractors themselves would send their copies of the reports.

But ED ended all of that. No more sharing, no transparency. It is now a secret program, and it’s a terrible turn.

NCLC spends a lot of time discussing their experience with ED in preparation for this report. In fact, the group had to file suit against ED to get copies of certain materials after a heavily redacted FOIA request reply (printed in its entirety in the report for dramatic effect).

I’m convinced this is the impetus for the entire report. ED really did put NCLC researchers through the ringer in their search for the information which should be publicly available.

NCLC published a one-sided and agenda-driven report. We don’t know why. But there is clearly bad blood between the group and ED.

There are plenty of things wrong with the student loan debt collection contract, things that have been documented and are in the process of being corrected (if not corrected already). To publish an incendiary report like this serves no good whatsoever. Student loan collection is a viable market, no matter how “icky” some might believe it to be.

If anyone is wondering why we, insideARM.com, or I, Patrick Lunsford, should be getting involved, I’ll note that both the site and I are extensively cited throughout the report. So I think we have grounds to comment on it.