Effective debt collection helps the student loan landscape

Effective debt collection helps the student loan landscape
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The House Appropriations Committee recently held a hearing to examine the oversight of vendors under contract with the U.S. Department of Education. And both the House Education and Labor Committee and Senate Health, Education, Labor and Pensions Committee kicked off their efforts to reauthorize the Higher Education Act. During the hearings, several witnesses discussed the best way to reform the federal student loan program so that it works better for struggling borrowers and taxpayers.

Unfortunately, too few borrowers today actually are in repayment on their loans (when adding in the number of student and parent borrowers in deferment, forbearance, delinquent, or in default). This is made all the more real, but puzzling, when you consider the department’s inexplicable delay in contracting with large collection agencies to assist struggling borrowers — a delay that has been soundly rejected by the U.S. Court of Federal Claims.

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Because of the department’s inaction dating to 2014 (the last year the department maintained a full complement of large and small business agencies), potentially hundreds of thousands of borrowers are languishing in default on federal student loans, unable to pursue loan consolidation, rehabilitation and loan forgiveness or qualify for additional federal student aid. Worse yet, the department soon will recall the accounts of defaulted borrowers who are in repayment and trying to rehabilitate their loans from all but two of the remaining large agencies, even though the agencies have established relationships with these at-risk borrowers.

In the federal student loan landscape, effective debt collection plays an important role for  borrowers and taxpayers. In addition to servicing the federal defaulted student loan portfolio, struggling borrowers receive repayment and rehabilitation assistance, loan discharges and other relief granted to them by Congress. Just as important, scare resources are returned to the federal student aid program so that future students have access to the same opportunities as those who came before them. In most cases, the agencies do not simply perform traditional collection activities, but rather, engage borrowers that are in default on how best to successfully achieve loan rehabilitation, pursue loan discharge, or consolidate their loans.

Based on current and historical data in the Federal Student Aid Data Center, the department is leaving billions of dollars in lost recoveries on the table each year. To add perspective, in 2014, the department managed a $55.9 billion portfolio of defaulted loans. It contracted with 17 large and five small business agencies, which together recovered $10.6 billion on behalf of taxpayers, a recovery rate of 19 percent. Today, the department manages a portfolio nearly three times as large ($166 billion as of Dec. 31, 2018) and soon may have only 11 small business agencies working the accounts.

Those 11 agencies, with the assistance of seven large collection agencies with limited inventory, recovered $10.43 billion in FY 2018. This is an impressive total for so few agencies, but a recovery rate of only one-third of that achieved in FY 2014. A comparable recovery rate on today’s portfolio would net approximately $31.5 billion annually, or $21.1 billion more than achievable with the department’s current collection agency capacity. Given the pressure on domestic spending, it seems logical the department should be leveraging all available resources. Equally important, if all available resources were used to assist borrowers, many of the defaulted accounts could be brought current.

The department has argued that its Next Generation Financial Services Environment (NextGen) initiative will focus on late-stage delinquency and eliminate future defaults. Whether or not that is true, the initiative ignores those federal student loans that are in default, a figure that continues to grow by almost $25 billion and 90,000 borrowers per year. And surely there are numerous programs that could benefit from an additional $21 billion per year?

As the House and Senate begin to work on the FY 2020 appropriations process and the reauthorization of the Higher Education Act, it is vital that Congress receive answers from the department on the state of the debt collection services contract. Struggling borrowers must receive the necessary support they are guaranteed under the law, such as valuable repayment assistance, that will help them balance their higher education obligations with other monthly bills. At the same time, taxpayers need to know their significant investment in the federal student loan program is being properly managed

James P. Bergeron is president of the National Council of Higher Education Resources (NCHER), the nation’s oldest and largest higher education finance trade association. Its members include lenders, servicers, guaranty agencies, collection agencies, financial literacy providers and schools.