The Obama administration should radically restructure the office of the Education Department that handles student aid, and it should stop paying private debt collectors to chase borrowers who have defaulted on their student loans, attorneys at the National Consumer Law Center said in a report Wednesday.
The center's report is the latest in a long series of critical reviews taking aim at Education Secretary Arne Duncan's management of the Office of Federal Student Aid (FSA), and specifically the office's troubled oversight of the roughly two dozen debt collectors it pays nearly $1 billion annually to help distressed borrowers make good on their defaulted debts.
The Education Department's inspector general has faulted the unit for ignoring both borrowers' complaints and its own debt collectors' potential violations of federal consumer laws. The department's internal auditor also has criticized FSA for partially paying its debt collectors based on the collectors' own estimates, rather than using documented invoices. The Government Accountability Office, the congressional watchdog that investigates how the federal government spends taxpayer dollars, has found instances in which the federal student aid office documented apparent violations of federal debt collection laws, yet did nothing about it.
"The government's use of private collection agencies is incompatible with the equal access goals of the Higher Education Act and with the goal of giving borrowers fresh starts," Deanne Loonin and Persis Yu, borrower advocates with the National Consumer Law Center, wrote in their report. "The government funnels enormous profits to private companies to hound borrowers. The needs of borrowers and taxpayers should be prioritized over profit for private companies."
Borrowers who fall behind on their student loans for about 12 months are deemed to be in default, setting off a series of actions that can include wage garnishments, frequent calls from debt collectors and the seizing of government benefits. The resulting negative mark on borrowers' credit profiles can affect their search for a new job and their ability to rent an apartment.
The consequences of being in default on federal student loans are viewed as so onerous that Congress created opportunities for distressed borrowers to easily get themselves out of default. Borrowers may quickly pay off the debt, or they can make nine on-time payments within a 10-month period to lift their accounts out of default. Congress said the payments must be "reasonable and affordable."
But the Education Department, Loonin and Yu said, is failing to carry out Congress's directives because of its inadequate attention to how its debt collectors interact with borrowers. The Education Department pays debt collectors based on the amount of debt they're able to recoup or bring current, while generally ignoring complaint data and failing to investigate allegations of law-breaking.
"The department rewards [debt collectors] based on the total amount of money collected from student loan borrowers, regardless of the harm caused to student loan borrowers and regardless of legal compliance," Loonin and Yu wrote. "Ironically, this same system, which lets collection agencies break the law without consequence, imposes severe consequences on borrowers when they get into trouble and fall behind on their payments."
During the four-year period ending in 2016, the federal student aid office is forecast to pay its debt collectors a combined $5.8 billion in commissions, Dwight Vigna, a top FSA official, said in a November presentation to an industry association.
"Although the government must balance the need to collect student loans with the need to assist borrowers, the current system heavily favors high pressure collection and debt collector profits to the detriment of financially distressed borrowers seeking the help they so desperately need," Loonin and Yu wrote.
The Education Department's debt collectors have a history of violating borrowers' federal consumer rights, Loonin and Yu said, citing their own experiences working on behalf of distressed borrowers.
Borrowers are frequently misled or given false information, and the Education Department doesn't care to look into complaints or discipline its debt collectors, Loonin and Yu charged, citing past audits by the Education Department's inspector general and the Government Accountability Office.
For example, the Education Department's debt collectors are required to offer most borrowers in default the opportunity to rehabilitate their bad debts by making nine on-time "reasonable and affordable" payments based on their "total financial circumstances" within a 10-month period.
"Total financial circumstances" is generally used to refer to a borrower's financial position, such as monthly income and expenses.
But James Null, a compliance manager for Windham Professionals, one of the department's larger debt collectors, testified in a deposition that his employer didn't consider borrowers' financial circumstances when telling borrowers the minimum monthly payment Windham would accept on the Education Department's behalf.
Edward M. Sheehan III, an executive vice president at Windham, didn't respond to a voice mail message seeking comment. The Education Department is aware of Null's deposition. "I'm not in a position to comment on the [NCLC] report because we haven't seen it yet," said Dorie Nolt, an Education Department spokeswoman.
Nolt declined to make any department officials available for an interview to discuss the department's debt collectors. She has previously declined to comment on Windham.
"Communicating with borrowers about options and helping them resolve their student loan debts is simply not the primary mission of collection agencies," Loonin and Yu wrote in their report. "To compound the problem, the government has turned a blind eye to borrower complaints and known abuses by debt collection agencies."
Part of the reason for this, said Loonin and Yu, lies in the structure of the federal student aid office. The office, unlike most federal agencies, is structured as a "performance-based organization." The distinction means that FSA has to meet certain measurable goals, like minimizing costs, but is generally given greater latitude in how it can achieve those goals. It also is able to pay its employees handsome bonuses.
FSA, according to Loonin and Yu, is supposed to act on behalf of its customers -- but that term encompasses active students, borrowers who have left school, colleges and the financial institutions FSA pays to deal with borrowers. Those different groups often have conflicting needs and goals, they said.
"Students are only one of these groups and are often the least powerful," Loonin and Yu wrote. "The performance-based organization structure is to blame for some of the ongoing conflicts of interest within the department."
The borrower advocates recommend that Congress abolish the performance-based structure of the federal student aid office and discontinue its use of private debt collectors. The Internal Revenue Service previously used private debt collectors, but stopped after receiving complaints about how the collectors treated taxpayers and about their soaring costs relative to the amount of revenue they returned to the U.S. Treasury.
Criticism of the federal student aid office appears to be affecting the Education Department's standing on Capitol Hill, where Senate Democrats are questioning the unit's use and oversight of private debt collectors.
Sen. Tom Harkin (D-Iowa), who as chairman of the Senate Health, Education, Labor and Pensions Committee oversees the Education Department, has proposed legislation that would call on the Education Department to ban contracting with any debt collectors found to have violated major federal consumer protection laws.
Harkin has also proposed requiring the department to conduct a study of its debt collectors, with an eye toward how borrowers are treated and the cost of contracting with debt collectors compared to using traditional government methods.
Some higher education watchers claim that Harkin's eventual goal is to prohibit the Education Department from using private debt collectors altogether.
"The proposed study must be treated as a serious threat, as it is clear evidence that several Democrats on the HELP Committee seriously question the need for [private debt collectors] and have decided a call for an obviously stacked report is the first step toward eliminating the private sector," Wes Huffman, director of research and communications at the lobbying firm Washington Partners, LLC, wrote in a July note to clients.