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Federal government ending use of student loan debt collectors, using servicers instead

This piece was first published at The Washington Post.

The Education Department plans to stop using private debt collectors to handle overdue student loans, a practice that had drawn scorn from activists who said the companies stop at nothing in pursuit of tardy loans.

The decision emerged this week in a legal filing, in which attorneys for the department implored the U.S. Court of Federal Claims to dismiss a lawsuit filed by collection agencies vying for a federal contract. The attorneys say the case is no longer relevant because the Education Department is revamping the collection and resolution of overdue student debt.

Instead of having private collection agencies solely dedicated to recouping past-due education loans, the department will add those duties to the responsibilities of companies that service loans. Those companies will try to help borrowers who fall behind on their payments before they end up in default.

The strategy is part of a broader overhaul of the federal student loan program, a project dubbed the Next Generation Financial Services Environment, or NextGen. While the Federal Student Aid office implements its new approach, the 13 private debt-collection companies already under contract will absorb new accounts until the transition is completed. The department has yet to set a completion date.

“Federal Student Aid’s need for private collection agency services as a function separate from the work provided by the enhanced servicer(s) will diminish rapidly in the coming months and ultimately become nonexistent,” the attorneys said in the court filing.

The private collection agencies involved in the case could not immediately be reached for comment.

The Education Department’s use of collection agencies has long been a point of contention among liberal lawmakers and advocacy groups. Critics say the private firms pursue collection at all costs, with no consideration for providing borrowers with sustainable solutions to managing their debt...


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