With nearly a quarter of federal student loan borrowers in default, borrowers need a system that will help them to successfully repay their loans. Unfortunately, the Department of Education continues to reward contractors that lie to borrowers and to incentivize programs that set borrowers up for failure.
InsideARM reports that over the weekend, the Department of Education assigned the accounts of 325,000 defaulted student loan borrowers to Pioneer Credit Recovery (owned by Sallie Mae/Navient) and Alltran (formerly known as Enterprise Recovery Systems). The Department had fired those two collection agencies in February 2015 for providing inaccurate information to borrowers about their options for removing their loans from default.
According to the press release at the time, the Department reviewed 22 private collection agencies to ensure that they were not engaging in unfair or deceptive practices and were complying with all applicable Federal and State laws. It found that these two companies, along with three others, “made materially inaccurate representations to borrowers about the loan rehabilitation program, which is an option that can create benefits to defaulted borrowers.” The Department explained that these companies “gave borrowers misleading information about the benefits to the borrowers’ credit report and about the waiver of certain collection fees” and did so “at unacceptably high rates.”
Those companies sued the Department and, after the Trump administration took over, the Department said it would reconsider assigning accounts to these same companies despite the 2015 audit against them. A court order that had prevented the Department from assigning new accounts to debt collectors has recently been lifted, and the Department has started assigning student loan borrowers to debt collectors—including Pioneer and Alltran—again.
Student loan borrowers deserve accurate information regarding their loans. When companies break the law and lie to student loan borrowers, the government should not be rewarding them with lucrative government contracts.
But the deeper problem lies with the debt collection contract itself. As we found in our 2014 report, Pounding Student Loan Borrowers, collection agencies steer borrowers into rehabilitation programs because doing so earns them higher commissions, even though the rehabilitation program leads to worse outcomes for borrowers. Recent Consumer Financial Protection Bureau (CFPB) data confirms that the volume of defaulted loans that are rehabilitated is growing but that rehabilitation is failing to set borrowers up for repayment success.
Rather than rushing to award this same contract, the Department should take this opportunity to create a system that actually helps student loan borrowers address their loans.
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