Washington, D.C. — Today, 12 U.S. senators sent a letter to U.S. Secretary of Education Betsy DeVos and the chief operating officer of the Office of Federal Student Aid (FSA), A. Wayne Johnson, demanding that they justify the use of private debt collection agencies (PCAs) in the federal student loan system. The Department of Education contracts with these companies to manage borrowers’ accounts after they default, but their efficacy is questionable.
Today, the Center for American Progress published a column discussing the issues of private collection agencies, arguing that PCAs could be replaced by current loan servicers and that doing so would be a better long-term investment for students’ outcomes.
Currently, the Department of Education pays private debt collection agencies $1.4 billion to collect on federal student loan borrowers in default—a cost shouldered by American taxpayers. Furthermore, just 4 percent of collected funds were made through voluntary payments to PCAs. The rest were recovered through federal mechanisms, ones that the senators believe can be leveraged through less wasteful means.
“Now is the right time to consider whether private collection agencies are worth what they’re being paid,” said Colleen Campbell, associate director for Postsecondary Education at CAP and author of the column. “Our aid system is about supporting students, not tracking them down and recovering funds. The FSA’s goal should be to funnel resources into keeping borrowers out of default, not hounding them when they’re in trouble.”
Both the CAP column and the senators’ letter express significant concerns about the effectiveness of debt collection agencies and their cost to taxpayers:
- Misaligned goals: Student aid programs are intended to provide affordable educational opportunities to all students. Collection agencies are about one thing: maximizing funds repaid. This lack of mission alignment leads to collection agencies overcompensating to fall into step with the mission of federal student aid.
- Poor return on investment: The Consumer Financial Protection Bureau (CFPB) estimates that the Education Department pays PCAs $40 in compensation for every $1 recovered from borrowers through loan rehabilitation.
- Undue burden on borrowers: Borrowers are required to pay collection fees, which can be as much as 25 percent of the borrower’s loan amount. The fees charged are in no way connected to the cost borne by the collector in working the borrower’s account. Because the agencies can still collect profit this way, agencies have a financial incentive to pursue even small debts that would be written off in the private market.
- Heavy subsidies for mediocre outcomes: PCAs are paid more than $1,700 to help borrowers get their accounts back into good standing. But the CFPB found that more than 40 percent of those borrowers will default again. These results indicate that the system is not currently built to support long-term success for borrowers.
The Department of Education has three weeks to respond to the senators’ request. However, it is likely that this letter will spur conversations not only on the value of private collection agencies but also on the goals of the broader federal student aid system.
To read the letter, click here. To read the column on issues with PCAs, click here.
For more information on this topic or to speak with an expert, contact Kyle Epstein at [email protected] or 202.481.8137.