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Problems with Collection of Student Loans

The U.S. Department of Education has not properly overseen the collection agencies it hired to pursue delinquent federal student loans, according to a July 2014 audit released by the department’s inspector general.

The report found that the Education Department did not make sure the 22 companies under contract were collecting debt in line with federal law and contract terms. The department also had not effectively monitored borrowers’ complaints or ensured that corrective actions were taken and failed to penalize companies for ongoing bad behavior.

Recurring borrower complaints are supposed to lead to a reduction in their performance scores, under the terms of the government’s contract with the collection agencies. The audit states that, in spite of the more than 3,000 complaints the department received between the 2010 and 2012 fiscal years, officials never docked the scores of any of the companies.

In its response to the audit, the Office of Federal Student Aid (FSA), the division of the Education Department that oversees the collection agencies, concurred with most of the report’s recommendations for reform, saying corrective policies had been and would continue to be instituted – including new directions to the collection agencies and a promise to take borrower complaints into account when evaluating them.

The inspector general’s investigation found that FSA did not account for service quality when deciding how to award compensation to the agencies. If a borrower complained about an improper collection practice, for example, one the department had previously warned a company against, FSA did not penalize the agency financially for continued poor performance.

Auditors also found FSA officials did not effectively ensure that companies were abiding by federal collection laws and related contract terms. For example, monthly quality-control reports containing information about the companies’ own monitoring of their compliance with state and federal laws were readily available, the report states, but the auditors “found no evidence that anyone in FSA evaluated” those reports.

The portfolio of defaulted loans assigned to private collection agencies totaled more than $34 billion as of December 31, 2013, according to the report. From the 2010 to 2013 fiscal years, the department paid 22 companies $1.59 billion to collect debt payments for student loans. In 2012 alone, the department paid $448 million in commissions and $8.3 million in bonuses to collection agencies, based on estimates.

The Education Department previously has faced other criticism for its oversight of federally contracted debt collectors. A May 2013 inspector general report found that the department had paid out bonuses to the companies without verifying that they had actually been earned. A consumer advocacy group also has criticized department officials for keeping secret how it pays out bonuses to the collection companies.

In a 2012 report, the National Consumer Law Center accused the department of failing to protect student borrowers, and of creating financial incentives that encouraged collectors to put profits first. ACA International quickly responded to that report. The report also said official complaint reports underestimated the scope of the problems borrowers had experienced with debt collectors.

The consumer law center sued the Education Department in May to turn over records on incentives for debt collectors.