As some of you may know, the current system that the U.S. Department of Education uses to collect on defaulted federal student loans is… messy. To put it nicely.
The Dept. of Education contracts with over 20 individual private third-party debt collection agencies to pursue defaulted federal student loan borrowers. Individual student loan accounts are often shuffled from agency to agency, leaving borrowers confused and unsure about who is actually handling their student loan. The government has paid these agencies billions of dollars over the past several years, but numerous reports have chastised the Department for shoddy oversight, allowing abuses and violations of the law to run rampant. The Department continues to contract with agencies accused of serious, systematic violations of the law. Meanwhile, default rates are only getting worse.
Something clearly isn’t working.
The Department recently announced that it is beginning a pilot program whereby employees of the U.S. Department of Treasury will pursue defaulted student loan borrowers on behalf of the U.S. Department of Education. This would effectively “insource” collections by keeping the activity within the federal government, as opposed to the “outsourcing” model we see now, with the employment of many private debt collection companies.
I have very mixed feelings about this.
On the one hand, I think this could potentially save taxpayers a ton of money, and possibly result in better outcomes for student borrowers. Taxpayers foot the bill now for the billions of dollars paid to these private debt collection agencies, who don’t always follow the law or help struggling borrowers. Years ago, the IRS had a similar outsourcing model for pursuing delinquent taxpayers, but when they ended these contracts with private debt collectors and began doing the collections themselves, it was cheaper, there were fewer consumer complaints, and the government actually recovered more money. In other words, a pretty fair deal for everyone.
On the other hand, important consumer protection laws are in place to protect people from the abuses of private third-party debt collection agencies. Not all of these laws apply to situations where the government is the one doing the collecting. It’s generally much harder to sue the government for collections abuses (or any violations of the law, for that matter) than it is to sue a private company or third-party debt collector. This could leave borrowers subject to direct government collection with little recourse.
Ultimately, I think starting with a pilot program is a good idea. We need to see how this works, and what the benefits and problems might be. I’m all about cutting out the middlemen, saving money for taxpayers, and getting better outcomes for borrowers. Let’s just make sure that’s what we are getting, and not leaving borrowers with even fewer options than they already have.