September 17, 2014 — Report

The U.S. Department of Education refers every eligible defaulted debt to one of 22 private collection agencies. Despite the history of consumer abuses by the collection industry, the United States government hires collectors not only to collect money, but also to communicate with borrowers about options to address student loan debt and to help borrowers resolve their debt.

There is inherent conflict in these dual responsibilities. Communicating with borrowers about options and helping them resolve their student loan debts is simply not the primary mission of collection agencies. Debt collectors are not adequately trained to understand and administer the complex borrower rights available under the Higher Education Act. To compound the problem, the government has turned a blind eye to borrower complaints and known abuses by debt collection agencies.

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.

This report focuses on the government’s private debt collector program, first describing how the current system works and what it costs. Next, the report details the incentive compensation system and how this system leads to abuses by private collection agencies. It then compares the Department of Education’s evaluation of its private collection agencies with complaints to the Federal Trade Commission and the Better Business Bureau. Finally, the report explains how the structure of Federal Student Aid (FSA) enables widespread violations of consumer protection laws and prevents borrowers from accessing their rights. The report concludes with recommendations for reform.