US Department of Education Under Fire for Contractors’ Shady Student Loan Practices

Posted by on November 9, 2015 in Economy with 4 Comments

   |  HuffingtonPost

The U.S. Department of Education, under fire for its lackluster oversight of student loan contractors, said Friday it will terminate its relationship with five debt collectors after accusing them of misleading distressed borrowers at “unacceptably high rates.”

The surprise announcement follows years of complaints about allegedly illegal debt-collection practices by Education Department contractors, the department's seeming lack of interest in ensuring that borrowers are treated fairly, and the relative opacity of the entire operation.

The most prominent of the debt collectors, Pioneer Credit Recovery, is owned by Navient Corp., the student loan giant formerly known as Sallie Mae. Pioneer, under investigation by the Consumer Financial Protection Bureau, generated $127 million from the contract over the past two years, according to its annual report to investors on Friday. It has worked for the Education Department since 1997.

With the number of borrowers in default now more than 7 million as federal student debt surpasses $1.1 trillion, the contracts have become among the most lucrative Education Department offerings, generating hundreds of millions of dollars a year for debt collectors tasked with recouping cash from borrowers who have defaulted on their federal student loans. In November 2013, Dwight Vigna, the Education Department official who oversees the program, told the financial industry that debt collectors stood to reap nearly $5.8 billion in commissions over the four-year period ending in 2016.

But the department's debt collection program has also become a headache for Education Secretary Arne Duncan, as plaintiffs' lawyers, state and federal regulators and borrower advocates have demanded changes after discovering evidence that borrowers in distress were given false information or otherwise mistreated when they tried to make good on their debts.

The Education Department said Friday that its decision was prompted by what it described as “high incidences of materially inaccurate representations” to borrowers that it discovered in reviews spanning several months. The five debt collectors, according to the department, misled borrowers about their options to get out of default, the resulting benefits to their credit reports and collection fees. Misleading borrowers about their defaulted debts may violate federal fair debt collection laws.

“Every company that works for the department must keep consumers’ best interests at the heart of their business practices by giving borrowers clear and accurate guidance,” said Education Undersecretary Ted Mitchell. “It is our responsibility — and our commitment — to uphold the highest standards of service for America’s student borrowers and consumers.”

The admission that some of its contractors likely violated borrowers' rights under fair debt collection laws will likely lead to increased scrutiny of the department's debt collectors, oversight of them, and how borrowers may have been harmed.

The Education Department didn't respond to queries beyond an emailed news release.

The Treasury Department is among federal agencies that have been concerned by the Education Department's debt collection program. The Huffington Post reported in November that the Treasury would soon take some student borrowers' accounts away from the Education Department's contracted debt collectors and give them to federal workers in a pilot program that may cut out student loan middlemen…

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4 Reader Comments

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  1.' Ronnie Joe Sullivan Jr. says:

    Summer Sullivan

  2.' Sara Tucker-Graham says:

    Appears that “corruption” is the name of the game the government plays…….js.

  3.' Liam Havard says:

    Education is a business…in this country.

  4.' LaMitria Johnson says:

    Seemingly its a way to cover up what should have already been tooken seriously; just as they are making it a priority to harass about the funds being in default along with threats and the recovery plan. Just thinking if its a business why arent the funds used to help in the refinancing portion of credit?

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