Terminated Student Loan Debt Collectors May Get a New Lease on Life from the Department of Education

Two of the five student loan debt collectors fired by the Department of Education (ED) last month may not be so fired after all.

Coast Professional Inc. and National Recoveries Systems were two of the five that ED announced were having their contracts signed in 2009 terminated. The other three who lost out were Enterprise Recovery Systems; Pioneer Credit Recovery, owned by Sallie Mae spin-off Navient; and West Asset Management. The contracts were ended when ED concluded that the debt collectors made "materially inaccurate representations" to borrowers who were attempting to pull their loans from default.

But while the 2009 contracts are toast, new deals signed in September 2014, also for debt collection on student loans and by the same debt collectors, may be still be good to go.

The contracts were among 11 handed out to private collection agencies, or PCAs. Why ED has had a change of heart about two of them is not clear.

“These are different contracts," said Dorie Nolt, a press secretary at ED, concerning the deals signed in 2009 and the deals signed in 2014. "On February 27, the Department announced it was winding down a set of 2009 contracts with five PCAs."

She added that "two of the PCAs on that list had won separate contracts in 2014."

"Accounts will not be assigned to any PCA under the 2014 contracts until August 2015," said Nolt, "and the Department has not yet decided what action it will take with regard to these two PCAs."

"We will consider all relevant information before placing accounts under the 2014 contracts," she added. "We want to make sure that these companies are doing right by student borrowers, and we will not hesitate to step in and take any action that’s needed.”

Coast Professional, based in land-locked Genesco and Rochester, N.Y., and National Recoveries Systems of Blaine, Minn., are suing the Department and will likely have their day in court between now and August. In a filing in the U.S. Court of Federal Claims, Coast Professional accused ED of not following proper procedures and arbitrarily cutting ties with its contractors. It wants the court to prevent ED from sending new business to collectors who had their deals extended.

Enterprise Recovery Systems Inc., of Oak Brook, Ill. is seeking similar relief. A federal judge consolidated all three cases—Coast Professional, National Recoveries and Enterprise Recovery--on March 11. Oral arguments will be heard on April 8.

Separately, a fourth debt collection agency, the Navient-owned Pioneer Credit Recovery of Arcade, N.Y., formally protested ED’s decision with the Government Accountability Office, which resolves disputes between federal agencies and contractors that want to stay out of court. The GAO has 100 days to make a non-binding recommendation.

A Department of Education official who spoke on background emphasized that none of its borrower accounts that have been ear-marked for collection have been distributed to any of the collection agencies awarded contracts in 2014. Without specifying dates, the official stated that "'[d]uring the past several months, Federal Student Aid (FSA) began performing systematic reviews of all of its 22 contracted private agencies." Part of the Department of Education, the FSA is essentially a repository for federal student loan data. The official also said Coast Professional and National Recoveries were not under any investigation when the 2014 contracts were awarded. All of the contracts, the official said, were for debt collection.

By John Sandman