The Department of Education will stop using private debt collectors to handle overdue loan payments. This decision came to light after a May 23 legal filing by department attorneys. In February, the department announced it ended contracts with several private collection agencies for giving borrowers inaccurate information.
Attorneys for the Department of Education asked the U.S. Court of Federal Claims to dismiss a lawsuit filed by several debt collection agencies. In the filing, they said the Department of Education plans to change its debt collection practices, thus rendering the lawsuit useless, The Washington Post reported.
Rather than relying on private agencies, the department plans to let the companies that service the loans collect on overdue payments. The department lawyers said this move will shift the focus to better customer service and proactive outreach to give options to borrowers who are late on payments. This will allow borrowers to make other arrangements before they end up defaulting on their loans.
This should come as a welcome change to consumer advocate groups who have long criticized the department’s use of debt collection agencies. Debt collection agencies can be aggressive in their approach and don’t work to help borrowers come up with a solution for managing their debt.
Clare McCann, a former policy adviser during the Obama Administration, said that not only are debt collectors unwilling to help borrowers but they actually “complicate the process by taking defaulted students out of one system and putting them into another.”
Furthermore, using collection agencies also costs the federal government quite a bit of money. In January, congressional Democrats sent a letter to Education Secretary Betsy DeVos, noting that collection costs take 20 cents on the dollar.
Last year, the federal government spent over $700 million to collect on the loans of less than seven million defaulted borrowers. This is equivalent to what the government pays to service 33 million borrowers who pay their loans every month, The Post reported.
This recent move by the department is part of their bigger plan to overhaul the way student loans are serviced. They are currently working on Next Gen, which is the department’s attempt to modernize the ways student loans are processed and simplify the way borrowers repay their loans.
It isn’t entirely clear how this will play out, but eliminating debt collection agencies from the picture will likely be good news for most borrowers. Hopefully, borrowers will be able to find more options to help them get in good standing on the debt and avoid default.