Economy

These Student Debt Collectors Were Just Fired by the Federal Govt.

March 9th 2015

By:
Alex Mierjeski

February was a big month for student debtors and the companies that collect from them.

After stating that debt-collection companies were misrepresenting their services to student-loan borrowers late last month, the U.S. Education Department announced that it would “wind down” contracts with five debt-collection companies and transfer responsibilities to other contractors.

“Federal Student Aid borrowers are entitled to accurate information as they make critical choices to manage their debt,” Undersecretary Ted Mitchell said in a statement. “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. It is our responsibility – and our commitment – to uphold the highest standards of service for America’s student borrowers and consumers.”

The companies, which included Coast Professional, Enterprise Recovery Systems, National Recoveries, Pioneer Credit Recovery, and West Asset Management, “gave borrowers misleading information about the benefits to the borrowers’ credit report and about the waiver of certain collection fees,” according to a press release.

The federal student debt collection industry is an incredibly lucrative one—something critics and reform advocates are quick to call up. According to Bloomberg, Pioneer Credit Recovery’s parent Navient made a total of $65 million in revenue last year collecting for the Education Department. In 2012, the 22 collection companies the government used collected around $1 billion annually in commissions. Companies have faced criticism for strict collection policies “even when borrowers’ incomes make them eligible for leniency,” Bloomberg reported.

In the wake of the announcement, the government said it would enhance its monitoring of the 17 remaining private companies it contracts with and would also closely monitor students who were misled about the government’s loan rehabilitation program under the five offending companies.

Are loans profitable for the government?

The Department’s announcement coincided with another controversy regarding student loans in the form of a letter to Department of Education Secretary Arne Duncan from six senators, including Massachusetts Sen. Elizabeth Warren. The letter, signed by all Democrats, urged the government to offer relief to struggling debtors.

The letter noted that President Obama’s recent budget for the Department of Education projected that the department would make “several billion less in profits from federal student loans than it had previously estimated,” which is a step in the right direction, according to the Senators. But the Congressional Budget Office (CBO), they wrote, still estimates that the government will generate $110 billion in student loan profits over the next decade.

Federal revenue expectations vis-à-vis student debts were at the crux of the Senator’s letter—something they say the government needs to rethink: should the government stand to profit as much as it does? Is it right to be collecting off of the backs of students struggling to make payments on time through programs designed to lighten the load in the first place? Warren, for one, has called profit margin “obscene,” pushing for lowered interest rates. But critics point out that this view would equate the government’s collections with a private firms’—a stance inherently misguided since loans are given out at below-market interest rates, and lack many of the stipulations a normal loan might otherwise carry: credit history, a money down payment, or a repossess-able asset if the debtor defaults. Still others are skeptical of the consistently high federal profit estimations advocates like Warren often cite, calling into question the CBO equation used to asses government profits and losses they say favors liberal risk standards.  

The debate, regardless of its partisan nature at this point, is a necessarily difficult one to win: on one hand, close to half of Millennials are saddled with crippling student debt, with the rate of defaults on the rise. On the other, relaxed interest rates on those loans could spell trouble for the overall federal deficit and disproportionately burden taxpayers. This has led some to wonder—and very rightly so: could this conundrum be rooted deeper in the necessity of these loans in the first place?