A U.S. Treasury Department pilot program involving taking over the collection of defaulted student loan accounts could mean the work eventually will be pulled from private debt collection agencies. The project may begin as soon as next year, but that likely depends on whether Congress provides appropriate funding.

The Education Department has contracts with 22 private collection agencies - such as Navient Corp., formerly part of student loan giant Sallie Mae, and Nelnet Inc. - to collect loan payments. Contracts with its largest private collection agencies expire in April and the Education Department is reviewing proposals from bidders for the next round of contracts.

But the Treasury Department reportedly prefers possibly cutting out the student loan middlemen and giving the program to federal workers. The pilot, expected to be small in scope, likely will be administered by Treasury’s fiscal service bureau, which already collects payments for other federal programs.

The stakes are high for the federal government. From 2010 to 2013, the private collection agencies earned $1.6 billion in commissions and bonuses pursuing the delinquent student loans, according to the Education Department's inspector general. They're expected to receive another $5 billion through 2016, according to a November 2013 department estimate.

The increase in payments to collectors comes as more borrowers fall behind on their monthly federal student loan payments, creating a greater need for collections.

The portfolio of defaulted loans assigned to the 22 private collection agencies totaled more than $34 billion as of December 31, 2013. In 2012 alone, the department paid $448 million in commissions and $8.3 million in bonuses to collection agencies, based on estimates.

Student loans in default jumped by 11% in the year ending June 30 to $99 billion, Education Department data show. An estimated 7 million borrowers are now in default, up from 6.5 million borrowers last year.

News of the pilot program can't come as a shock to the collection industry.

Consumer advocates have repeatedly expressed concerns over allegedly illegal collection tactics from private collection agencies and a lack of response to complaints. The federal government appears to believe that bringing collections in-house will allow for better oversight.

In July, an audit released by the Education Department's inspector general, revealed the federal government agency was not properly overseeing the collection agencies under contract. The report found that it did not make sure the 22 companies under contract were collecting debt in line with federal law and contract terms. The Education Department also had not effectively monitored borrowers’ complaints or ensured that corrective actions were taken and failed to penalize companies for ongoing bad behavior, according to the report.

Recurring borrower complaints are supposed to lead to a reduction in their performance scores, under the terms of the government’s contract with the collection agencies. The audit stated that, in spite of the more than 3,000 complaints the department received between the 2010 and 2012 fiscal years, officials never docked the scores of any of the companies.

Treasury Department officials were not immediately available for comment on the pilot program. The Huffington Post first reported news of the pilot program. It is not known how quickly the federal government might choose to expand the pilot if it is deemed a success.

 

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