Looking for Student Loan Help From the Government? Good Luck

Ever wonder what a company does about the consumer complaints it receives?

If that “company” happens to be the U.S. Department of Education, the answer is nothing — at least according to a scathing report by the DOE’s Office of the Inspector General.

In its July 2014 audit of the “Handling of Borrower Complaints against Private Collection Agencies,” the OIG found that the DOE’s Office of Federal Student Aid failed to effectively monitor consumer-borrower complaints, institute corrective actions or hold the private collections agencies accountable that the department hires to administer its portfolio of defaulted student loans.

We’re not talking about deadbeat borrowers who are desperately attempting to change the subject. Rather, these complaints are often about loans that were incorrectly or improperly declared to be in default, accounts with problems that had previously been resolved, or where consumers’ rights under the Fair Debt Collection Practices Act are routinely violated.

Twenty-two private collections agencies enjoy five-year contracts with the DOE and are responsible for managing $34 billion of defaulted contracts. That’s roughly 7% of the total amount of government-guaranteed student loan debt currently in repayment mode — a metric that should inspire a good deal of concern.

The auditors found that directors and senior managers in the FSA’s Operations and Defaults Division “could not identify what type of complaint would be a concern to the department.” In fact, not only did they leave it up to the private collections agencies to decide which (if any) complaints to report — an enormous lapse in propert governance — the auditors also found no evidence that anyone at the FSA ever evaluated what they ultimately received, nor were any records of the complaints retained.

This is no small matter, considering the fact that the department paid out nearly $700 million in commissions and bonuses to these agencies. But that’s not the half of it.

What About the Consequences?

If any other regulated entity received a rebuke of this severity from its principal supervisory body, heads would roll, and for good reason. Harm to its reputation notwithstanding (if the news leaked), the potential for the imposition of a cease-and-desist order — the directions in which situations like these could easily head — might put the institution out of business. Even if the entity were not regulated — such as in the case of a private loan-servicing operation — the company would be equally imperiled should its stakeholders see evidence of the same level of neglect.

Not so in the closed-loop system that is the DOE, where one area criticizes another and management works hard to cover its assets in three ways: acknowledge the shortcomings it’s unable to dispute, promise to do better in the future and hope the whole affair blows over real soon.

Here’s an idea: How about starting from scratch?

The department would be wise to address the underlying reasons it needs 22 collections companies in the first place. Perhaps it has something to do with the quality of the work product that’s produced by its stable of subcontracted loan servicers. Government-backed student loans are deemed to be in default when they fall nine or more months past due — a mindboggling mismanagement of the payment-administration process, as far as I’m concerned. How tightly are these loan servicers being managed? How effectively do their compensation programs align performance with payment? How well do their contracts protect against the potential for gaming via short-term payment accommodations that are used to mask the extent to which delinquencies are present? And what about the apparent absence of a policy that prohibits affiliated companies from working both ends of the subcontractor spectrum?

Offering Relief vs. Collecting

Take for example Pioneer Credit Recovery — the recently (May 2014) spun-off debt-collection subsidiary of the Sallie Mae Corporation (SLM). The DOE paid $50.6 million to Pioneer in fiscal year 2013 — two-thirds more than the remitted average to the remaining 21 firms — for collecting defaulted contracts that may have even included those that its also recently spun-off SLM loan-servicing operation (both now under Navient Corporation) failed to prevent. That’s in addition to what the parent corporation earned for originating government-backed FFEL loans prior to the program’s discontinuation in 2010.

Is this how a taxpayer-funded program should be managed or how consumer-borrowers should be treated? Surely not. But to those who might rush to say, “All the more reason for the government to get out of the student-loan business,” I remind them of three things.

First, the entities that are responsible for the loan servicing and collections failures are private-sector firms. Left to their own devices — as the DOE seems wont to do — for-profit companies will do as little as they must to earn as much as they can. Second, the inappropriate things these firms are accused of doing may very well have been done by design. For example, (and third), the private sector has thus far refused to put into place debt-relief programs that are as effective as those that the feds have long established. Even in cases involving government-guaranteed FFELs, the private companies that control these contracts have been repeatedly cited by regulators and legislators for dragging their feet when it comes to providing relief arrangements to which borrowers are legally entitled.

If anything, this audit report should be seen for what it is: evidence of how the FSA’s staff is out of its depth on financial-services-related matters — how managers lack the experience (or ability) to devise compensation programs that drive desired behaviors, institute policies safeguard against favoritism (such as in the case of pyramiding awards to affiliated companies), and consistently oversee the end-to-end process and rigorously assess subcontractor performance.

This is the job they’re being paid to do. It is also the job for which they should be held fully accountable.