National Consumer Law Center Report: Pounding Student Loan Borrowers

September 26, 2014

This report from the National Consumer Law Center examines the consequences of the Department of Education’s outsourcing of student loan collections to private debt collectors. The report reveals that the Department of Education does little to protect its borrowers from debt collection abuse, and points out that in some respects, the way the DOE pays collectors positively encourages abuses.

Perhaps the starkest illustration of the problem is the case of NCO Group. NCO and its parent company, Expert Global Solutions, was fined by the FTC for violating federal debt collection laws in 2013. As the report notes NCO has been in similar trouble before, settling lawsuits with 19 state Attorneys-General for similar abuses. However despite this “NCO is one of the highest ranked PCAs [Private Collection Agencies] employed by the Department of Education” and received a bonus of $27 million in 2012. The Department of Education did not even consider NCO’s misconduct when awarding the bonus. Nor did the Department of Education take into account complaints against private collectors when ranking them.

In addition to the usual debt collection abuse, private collectors working for the Department of Education mislead borrowers about their debts. Student loans are complex, and collectors have plenty of opportunity to misrepresent the borrower’s options. The report notes one case in which not only the collector, but a Department of Education representative gave false information about the rehabilitation of a student loan:

[The Department of Education representative] said that the collection agency’s interpretation of DOE guidelines was correct. That any amount less than the balance sensitive repayment amount would not rehabilitate my client’s loan. . . . He said that [income-based repayment] would not be an option” (even if the loan were rehabilitated). Neither statement was true.

What can the Department of Education do about all this? The NCLC suggests that the DOE abandon the use of private collection agencies, avoid the conflicts of interest inherent in the current compensation scheme and make the collection and compensation system more transparent.