May 4, 2012 — Report

The U.S. Department of Education (the Department) relies on an increasing number of private collection agency contractors to recover defaulted student loans. Although the use of student loan collection agencies is not new, the impact of this policy on borrowers is greater than ever.

By contracting out its defaulted loan portfolio and failing to provide effective oversight, the Department has abdicated its responsibility to uphold the borrower protections in the Higher Education Act. These protections include affordable payment plans and loan cancellations in circumstances such as disability or death. The Department has created financial incentives for its contractors that encourage high collections at the expense of borrower rights.

Although official complaint reports likely underestimate the scope of the problem, there is growing evidence that borrower dissatisfaction with collection agencies has increased. There are numerous factors that contribute to the underestimation of complaints. This report focuses on the inaccessibility of agency complaint systems and poor agency tracking of complaints.

Borrowers must have an accessible way to lodge complaints when problems arise. This requires that collection agencies have fair and efficient borrower complaint systems. This report evaluates whether such systems are currently in place, focusing on whether borrowers are able to file complaints against student loan collection agencies and whether the federal government considers complaints in evaluating agency performance.

NCLC found that contractors do not maintain accessible complaint systems and some agencies ignore the Department’s minimum requirements for handling borrower grievances. Overall, the complaint systems used by some collectors display a haphazard approach to resolving borrower disputes. The Department also has failed to inform borrowers of the resources available through the agency to address complaints.

As long as the Department and its contractors can deploy extraordinary collections tactics to recover federal loans, borrowers must have an accessible way to register their dissatisfaction. An accessible complaint system is not a panacea. A long‐term solution is that the Department should simply stop using collection agencies to provide assistance to struggling borrowers. In the meantime, it is essential that the government aggressively oversee agency performance, evaluating agencies not only based on dollars collected, but also on service to borrowers. Tax dollars should not reward collectors who abuse borrowers, break debt collection laws, or who fail to inform borrowers of their options under the Higher Education Act.

An update was published in 2013.