Pounding Student Loan Borrowers: The Heavy Costs of the Government’s Partnership with Debt Collection Agencies

That's the name of this new report by the National Consumer Law Center. Here's the Center's overview:

The U.S. Department of Education refers every eligible defaulted student loan debt to private debt collection agencies. Collectors are hired not only to collect money, but also to communicate with borrowers about options to resolve their debt, creating a conflict of interest. Promoting paths to success for these borrowers is ultimately less costly for taxpayers, yet the Department hammers borrowers with draconian collection tools.The government must balance the need to collect loans with the need to assist borrowers. Yet, the current system favors high pressure collection tactics and private company profits. The system fuels widespread violations of consumer protection laws and prevents borrowers from assessing their rights.

Read the executive summary after the jump. You can also read the entire report, the report's various charts and tables, and the Center's press release. And read this story on the report by journalist Jonnelle Marte.

The U.S. Department of Education refers every eligible defaulted debt to one of 22 private
collection agencies. Despite the history of consumer abuses by the collection industry,
the United States government hires collectors not only to collect money, but also to
communicate with borrowers about options to address student loan debt and to help
borrowers resolve their debt.
There is inherent conflict in these dual responsibilities. Communicating with borrowers
about options and helping them resolve their student loan debts is simply not the primary
mission of collection agencies. Debt collectors are not adequately trained to understand
and administer the complex borrower rights available under the Higher Education
Act. To compound the problem, the government has turned a blind eye to borrower
complaints and known abuses by debt collection agencies.
Although the government must balance the need to collect student loans with the need
to assist borrowers, the current system heavily favors high pressure collection and debt
collector profits to the detriment of financially distressed borrowers seeking the help
they so desperately need.
This report focuses on the government’s private debt collector program, first describing
how the current system works and what it costs. Next, the report details the incentive
compensation system and how this system leads to abuses by private collection agencies.
It then compares the Department of Education’s evaluation of its private collection
agencies with complaints to the Federal Trade Commission and the Better Business
Bureau. Finally, the report explains how the structure of Federal Student Aid (FSA)
enables widespread violations of consumer protection laws and prevents borrowers
from accessing their rights. The report concludes with recommendations for reform.
Key Findings
The Collection Agency Contractor System Costs Billions
The costs of relying on private collectors are enormous for borrowers, taxpayers, and
society. Department projections show that taxpayers and student loan borrowers are
projected to pay over $1 billion in commissions to private student loan debt collectors in
2014, growing to over $2 billion by 2016.

There are extraordinary penalties for borrowers who go into default. When a borrower
has a defaulted federal student loan (a loan that is more than 270 days past due), the
government can seize certain income and assets from the borrower without a court
order. Low-income borrowers are especially harmed because the government often
seizes benefits, such as the Earned Income Tax Credit, that are aimed at promoting economic
mobility. Moreover, a borrower in default is prevented from receiving further aid
(including Pell grants) to return to school.
Government Incentives Drive Collection Agency Behavior and Harm Consumers
Recent changes in the compensation system demonstrate the relationship between the
incentives and borrower outcomes. The law clearly states that the monthly payment
for loan rehabilitation (an important right for borrowers seeking to get out of default)
should be based upon the borrower’s circumstances. However, prior to July 2012, it was
nearly impossible for borrowers to negotiate a rehabilitation payment amount that was
less than a percentage of the loan balance (called balance sensitive rehabilitation). This
rampant violation of consumer rights occurred in an era when the government’s collection
contract only paid the full commission rate if the collector-induced rehabilitation
payment amounts were at least the balance sensitive amount. In July 2012, the Department
amended the contracts to allow contractors to earn the full commission for arranging
either a balance sensitive rehabilitation or one that calculated payments based on the
borrower’s actual income.
The data shows that the number of rehabilitations skyrocketed after the change in the
incentives. The rules and regulations did not change during this period. The only change
was the way that the collection agencies were paid. The result was more affordable and
successful rehabilitations. Bottom line: money, not the law, drives collection agency
The report also discusses how the collection incentives are part of an overall structure
that creates confusion about who the collection agencies are working for. In fact, by its
very nature, the Department’s Federal Student Aid (FSA) agency has multiple constituencies.
Students are only one of these groups and are often the least powerful.
The performance based organization (PBO) structure is to blame for some of the ongoing
conflicts of interest within the Department. For example, FSA is supposed to act on
behalf of its customers but there is no single priority group of customers. The category
includes not only students, but also financial institutions and schools. The FSA by its
very nature has multiple constituencies, often with conflicting needs and goals.
Problems with the Collection Agency Evaluation System
The Department rewards the agencies based on the total amount of money collected
from student loan borrowers, regardless of the harm caused to student loan borrowers
and regardless of legal compliance. Ironically, this same system, which lets collection
agencies break the law without consequence, imposes severe consequences on borrowers
when they get into trouble and fall behind on their payments.

The Department evaluates the collection agencies it contracts with on a quarterly basis
using a metric called the Competitive Performance and Continuous Surveillance (CPCS)
score. The Department uses the CPCS score to determine the allocation of new accounts,
instilling fierce competition among contractors for hundreds of millions of dollars in commissions.
The three contractors with the highest score receive additional performance
compensation, which can add up to several million dollars a year for the top contractor.
This report documents the Department of Education’s pattern of disregarding the experiences
of student loan borrowers in collections. The Department frequently cites a low
volume of complaints to support its claims of effective oversight. However, documented
problems with the complaint system have led to the systematic underreporting of complaints
by collection agencies and the Department.
The National Consumer Law Center (NCLC) analyzed the CPCS scores for Fiscal Year
2012 and compared them to local Better Business Bureau complaint records and complaints
submitted to the Federal Trade Commission. Because of the Department of Education’s
inadequate system of collecting complaints, NCLC was forced to use proxies for
evaluating the Department of Education’s compensation and evaluation system for its
private collection agencies.
NCLC found the following problems with the Department’s evaluation system:
• There is no relationship between the Department’s scores and the volume of
• The Department has never deducted points from a collection agency for complaints;
• The Department failed to use the performance category that incorporates borrowers’
experiences; and
• The Department has given collection agency NCO Group, Inc. the highest rank
among the PCAs collection agencies several times in recent years, despite NCO’s
legal troubles with federal and state regulators.
Government Regulators Asleep at the Wheel
In 2014, separate reports by the Government Accountability Office (GAO) and the
Department’s Office of the Inspector General (OIG) found that Department of Education
oversight of its collection agencies was woefully insufficient. These problems are consistent
with the many problems that NCLC has documented and sent to Department staff
over the past several years.
Specifically, OIG found that the Department’s Federal Student Aid office failed to
monitor borrower complaints against its collection agencies, and it neglected to take
corrective action against those agencies when they did not improve. As a result of its
inadequate supervision, the Federal Student Aid office failed to ensure its collection
agencies abided by federal debt collection laws and the terms of their contractual agreements.
Although it is primarily the Department’s responsibility to ensure that its debt
collection agencies follow the law, borrowers can privately enforce violations of the
Higher Education Act through the Fair Debt Collections Practices Act.

The Department of Education on Lockdown
Ideally, there should be a transparent process for the public to know how its tax dollars
are allocated and whether government contractors are complying with the law. In fact,
President Obama has committed his administration to achieving new levels of openness
in government. Unfortunately, time and again, the U.S. Department of Education has
failed to live up to this promise. Instead, the Department has protected and rewarded
the interests of the private debt collectors it hires to collect from borrowers who have
defaulted on their federal student loans.
In preparation for this report, NCLC sent a Freedom of Information Act (FOIA) request
to the Department requesting a breakdown of the CPCS scores and the amount it paid
in bonuses to the collection agencies in fiscal year 2012. The Department initially denied
our request, providing only blacked out (redacted) information. NCLC eventually sued
the Department of Education to obtain the documents and information. NCLC’s recent
FOIA experience is consistent with growing secrecy at the Department. In response to an
earlier FOIA request that NCLC filed in August 2012, the Department provided a heavily
redacted version of its Private Collection Agency manual although this document
was previously publicly available on the Department’s website.
The government’s use of private collection agencies is incompatible with the equal
access goals of the Higher Education Act and with the goal of giving borrowers fresh
starts. The government funnels enormous profits to private companies to hound borrowers.
This is short-sighted policy that fails to provide a way out for borrowers struggling
to recover financially. Promoting paths to success for these borrowers is ultimately less
costly for taxpayers than hammering borrowers for the rest of their lives with draconian
collection tools. The needs of borrowers and taxpayers should be prioritized over profit
for private companies.

Recommendations for Reform
1. Eliminate the use of private collection agencies and move toward a comprehensive
and individualized counseling model. In deciding how to work with borrowers
in default, the Department should study alternatives and create pilot projects
with empirical research to test these options. The goal of this model should be to
match the borrower with the right program based upon his or her circumstances,
not just to collect the most money for the Department.
2. Reform the debt collection agency evaluation system so that performance is about
more than dollars collected. The evaluation system should ensure that government
contractors follow the law and act in the best interest of student loan borrowers.
3. Eliminate conflicts of interest by using neutral entities to administer extra-judicial
collection, such as administrative wage garnishment.
4. Improve transparency and provide public information about the private debt collectors’
performance, including complaints and any investigations or disciplinary
actions taken against private debt collectors and the cost of outsourcing to them.

5. Congress and the President should improve the Department of Education’s oversight
of collection agencies and require the Department to make public information
about how performance is tracked and the results. The Department’s Office of
the Inspector General and the Government Accountability Office (along with Congress
and the general public) should continue to monitor the Department’s
6. Hold collection agencies accountable through rigorous public and private
7. Improve the complaint system so that student loan borrowers can easily file complaints
about collection agencies. The Department should follow the lead of other
federal agencies such as the Consumer Financial Protection Bureau and create userfriendly
complaint systems with easy to find instructions and contact information.
8. End the Performance Based Organization experiment and set up a system that
clearly puts borrowers first.
9. Expand online options so that borrowers can more easily access programs, such as
rehabilitation, without needing to go through a third-party collection agency.
10. The Department of Education should improve its data collection system and
make the information public in order to ensure integrity of data collected and the
programs it administers.

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