A lawsuit filed last month by four student loan debt collection companies against the U.S. Department of Education was dismissed Tuesday by a federal judge.
Coast Professional, National Recoveries, Enterprise Recovery Systems and Pioneer Credit Recovery, which is owned by Navient - were part of a consolidated lawsuit. The collection agencies had argued the Education Department arbitrarily cut ties with them in February and asked a judge to order, among other things, that the Education Department stop providing new student accounts to competitors that had their contracts extended. The Education Department terminated contracts with five collection agencies after a review of 22 private collection agency contracts. The fifth agency involved, West Asset Management, did not take part in the lawsuit. The departments review found that some collectors made inaccurate representations to borrowers about a loan rehabilitation program, an option that can create benefits to defaulted borrowers after they have made nine on-time payments in a period of 10 months.
The collection agencies further were found to have given inaccurate information at unacceptably high rates. In particular, the agencies gave misleading information about the benefits to the borrowers' credit report and about the waiver of certain collection fees. Coast Professional, National Recoveries, Enterprise Recovery Systems and Pioneer Credit Recovery had argued that the decision to cut ties with them amounted to the government purchasing new services from their competitors without offering them a fair shot in the bidding process. But Tuesday's sealed decision by U.S. Court of Federal Claims Judge Francis Allegra is a clear victory for the Education Department, which appears to have successfully argued that it wasnt making a new procurement decision but simply exercising its discretion under an existing contract when it decided to stop doing business with the companies. Judge Allegra canceled a second hearing to discuss merits of the complaints after hearing from both sides last week. The Education Department's decision to wind down the contracts of the five collection agencies earned praise from consumer advocates and some Senate Democrats. Both groups had criticized the department for having lax oversight over the agencies. The department's collection contracts are often worth tens of millions of dollars with more than $42 billion in defaulted federal direct student loan debt at stake. Coast Professional CEO Brian Davis said in a statement that the company was disappointed with the decision. "We believe these were new contracts that the Department of Education awarded in an unfair and arbitrary process that did not allow all bidders to compete on a level playing field, he said. Enterprise Recovery Systems officials said the company plans to appeal the courts decision.Two of the agencies - Coast Professional and National Recoveries - still could potentially collect defaulted loans for the department under a different newer contract. The department has said it will not make a decision on that contract until this summer.