As disclosed in a notification filed on May 3, in FMS Investment Corp. v. United States (“the Notice), the Department of Education (“DOE”) will soon stop using private debt collectors to handle overdue student loan payments.  

In this post-award bid protest filed on February 9, 2018, in the United States Court of Federal Claims, twenty plaintiffs challenged the DOE’s decision to award contracts for collection of defaulted student loans to just two entities. In the Notice, submitted in the midst of the parties’ extensive motion practice, the DOE revealed its plan “to significantly enhance its engagement at the 90-day delinquency mark in an effort to help borrowers more effectively manage their [f]ederal student loan debt.”  

As the Notice explained, the parties “under contract with . . . [the DOE]” enjoy “sufficient capacity to absorb the number of accounts expected to need debt collection while the process for transitioning to th[is] new approach is developed and implemented,” thereby eliminating any actual need “for additional” private collection agencies. Thus, the DOE promised to cancel the challenged solicitation in general and terminate the specific awards to two entities on the basis of convenience, thereby rendering the bid protest entirely moot. The DOE then filed a motion to dismiss the case entirely, which was granted on May 25. 

So far, the finer details of the DOE’s proposal remain under wraps. Apparently, the DOE ultimately intends to authorize the same companies that service federal student loans to collect on any overdue payments. These “enhanced outreach efforts” are expected to “reduce the volume of borrowers that default, improve customer service to delinquent borrowers, and lower overall delinquency levels,” eventually enabling borrowers to strike other arrangements in lieu of default.  

Still, the likely savings may be considerable, as the federal government spent over $700 million to collect the loans of less than seven million defaulted borrowers, equivalent to what it pays to service 33 million borrowers who pay their loans every month. This move by the DOE is part of its bigger plan to overhaul student loan servicing. For example, its Office of Federal Student Aid is currently working on “Next Gen,” an attempt to modernize the processing and repayment of this ever-expanding slice of consumer debt.