*What’s improper bundling? The Office of Management and Budget (OMB) Circular A-129 describes two separate regimes for loan servicing and debt collection. Federal law requires PCAs to be compensated through contingency fees. Loan servicing is paid for through Congressional appropriation. Bundling loan servicing and default collection services creates an internal conflict of interest for any awardee because there is a natural incentive to shift work to that service that provides the highest compensation structure.
Then there was Covid
When Covid hit, the CARES Act instituted a payment pause and interest waiver for federal student loans ( details are here ). Some argued that this was not the right tool to use across the board because while many jobs were lost due to the pandemic, many also were not, and it was questioned whether those folks should get a free pass.
That free pass has now lasted for almost two years. And it had the effect of essentially shutting down (or severely shrinking) most of the PCAs on the collection contract. The final plug was pulled yesterday.
What happens now?
According to the Wall Street Journal, FSA chief operating officer Richard Cordray said collecting on defaulted loans would now be handled by the five contractors hired last year to provide customer support. He said the switch would have only a small effect on borrowers because of the current freeze on payments.
insideARM perspective
We’ll watch to see how this all plays out. There are currently 9 million borrowers with defaulted student loans. That's a big set of accounts.
It does sound reasonable that, for borrowers, ultimately dealing with one servicer -- even into default -- would be helpful. However, the practice of providing customer service is quite different from the knowledge, practice, and regulations associated with collecting defaulted debt. I believe at least one of the contractors is licensed as a debt collector. I suspect others will need to be as well in order to handle the volume of accounts. (So. does this mean there actually still is a private debt collection program?)
ED has argued for several years that a softer and more frequent touch would be all that’s needed to keep borrowers from defaulting. Those in the industry can tell you that no matter how friendly they are, consumers with past-due debt do not flock to their creditors looking to settle up, make arrangements, or generally be communicative.