October 25, 2014

The Government Lets Almost Anyone Collect on Defaulted Student Loans

Debt collection is an awkward business for the federal government. Government agencies have to handle debtors with more care than, say, banks, which can dispense with a distressed borrower by kicking his file over to their favorite collection agency. Or so one would think.

In the coming months, the Department of Education is expected to award a contract worth $1 billion annually to private debt collection agencies that go after borrowers who have defaulted on federal student loans. Forty-two companies are in the running for the award. Brian Friel, an analyst at Bloomberg Intelligence, thinks that most, if not all, of the bidders will receive a piece of the pie.

Why would the DOE take a seemingly indiscriminate approach to hiring debt collectors? Friel sees a couple of reasons. Washington has made a lot more direct loans since Congress overhauled student lending programs in 2010, increasing the pool of bad loans the government needs to collect on. Perhaps more important, bidders that lose out on federal contracts can appeal the decision, which then delays work on a contract. To expedite the process, agencies often award the job to all of the bidders.

To be clear, the government vets the companies that win contracts, at least to some degree. And there’s no obvious reason that letting more debt collectors share the work should hurt borrowers. On the other hand, you’re more likely to find a bad apple in a bigger barrel.
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The DOE did not respond to e-mails requesting comment, but it’s not hard to see why the agency would want to prevent a sore loser from slowing the process of awarding the collection contract. The government paid $898 million to collection companies that went after defaulted student loans in 2013, up 92 percent from the previous year. There were $91 billion in federal student loans in default as of Sept. 30, 2013, according to regulatory filings by Performant Financial, a Livermore (Calif.)-based collection company.

How much can the winners make? Action Financial, a Grants Pass (Ore.)-based company, was among the 11 companies awarded a small business set-aside in September. It stands to earn 15.2 percent of the repayments it collects, and a flat fee of $1,710 per borrower that it gets to make the minimum payment in nine consecutive months, according to a document posted online (PDF).

Collectors’ desire to cash in on those terms may be the best tool the DOE has for making sure its contractors avoid unscrupulous behavior. Winning a contract merely means the debt collectors are eligible to carry out the job; it doesn’t determine how much work the DOE will ultimately send its way.
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Staying in the agency’s good graces can pay off: Performant, which collected on defaulted loans under a previous contract, took in $75 million collecting on government loans in its most recent fiscal year. According to Friel, that was good for 29 percent of the company’s total revenue.

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