Coast Professional and National Recoveries, two of five debt collection companies whose 2009 contracts the U.S. Department of Education said last week it would end for allegedly misleading borrowers, are suing the department over the decision.

Coast Professional filed a complaint under seal in the U.S. Court of Federal Claims that accuses the Education Department of acting arbitrarily and not following proper procedures. It asks a judge to order, among other things, that the department stop providing new student accounts to its competitors that had their contracts extended.

National Recoveries and Enterprise Recovery Systems Inc. are seeking similar relief. Their complaints were filed under seal. 

A federal judge on Wednesday consolidated the three cases and scheduled oral arguments for April 8.

Pioneer Credit Recovery, owned by Navient, also is set to lose the 2009 contract. The company last week filed a formal protest of the Education Department’s plan with the Government Accountability Office, which resolves disputes between federal agencies and contractors as an alternative to litigation.

The GAO has 100 days to make a recommendation, which is not technically binding, although the office's recommendations are customarily followed by federal agencies.

West Asset Management is the fifth agency set to lose the 2009 contract. 

The decision to terminate the contracts comes after the department's review of 22 private collection agency contracts. The 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 five collection agencies were found to have given inaccurate information at unacceptably high rates about those benefits. In particular, the agencies gave borrowers misleading information about the benefits to the borrowers' credit report and about the waiver of certain collection fees.

The Education Department plans to reassign accounts held by the five agencies that are not already in repayment to other agencies. 

A redacted copy, obtained by Insider Higher Ed, of Coast Professional's complaint against the Education Department asks a judge to order that the department stop providing new student accounts to its competitors who had their contracts extended.

The department, meanwhile, will issue new guidance to all remaining private collection agencies under contract, increase internal training for the department’s Federal Student Aid staff, improve the private collection agency manual, expand monitoring for many issues and refine its internal escalation practices.

The five collection agencies possibly could actually continue collecting defaulted loans for the Education Department under a different contract. A department official, who declined to be named, told Inside Higher Ed on Wednesday that potential action on 2014 contracts has not been determined.   

In a related report this week, the Consumer Financial Protection Bureau has found deceptive student loan debt collection practices, unfair and deceptive overdraft practices, mortgage origination violations, fair lending violations and mishandled disputes by consumer reporting agencies.

  

 

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