A recent ruling by the U.S. Court of Federal Claims has made it more likely that an ambitious overhaul of the federal student loan servicing industry will be forthcoming.

As background, the U.S. Department of Education has announced plans to make sweeping changes to the student loan industry by requiring that its loan servicers be able to service the loans throughout the loan’s entire life cycle, from origination to payoff. The plan, called Next Generation Financial Services Environment (“NextGen”), intends to modernize the student loan industry by, among other things, establishing a single website portal for the management of student loans under one central “brand”. Student loan servicers selected through the federal government contract procurement process will service the loans, including default and collections, under this singular brand.

As NextGen will require its loan servicers to manage an entire loan “from cradle to grave,” it effectively excludes companies that currently only handle one aspect of student loan servicing such as collections. These companies have repeatedly objected to the federal government’s plans by challenging NextGen’s government contract procurement process.

In FMS Investment Corp. v. United States, one of the most prominent of such challenges, several private collection companies sued the federal government, contending that a recent NextGen government contract solicitation was unlawful because it restricts competition and violates state and federal laws governing debt collectors, including the Fair Debt Collection Practices Act. In particular, the private collection companies argued the solicitation, which required contractors to collect student loan debts under the government’s singular brand name, would violate parts of the FDCPA requiring that the debt collector’s identity be disclosed to the consumer. The collection companies also argued that the solicitation’s requirement of increased communications with customers might violate state laws that strictly limit how often a debt collector can contact a consumer. More generally, the private collection companies objected that no comprehensive legal analysis of NextGen had been conducted.

The private collection companies lost that suit on July 31, when the Court denied their motion for a permanent injunction halting the solicitation and granting the government’s motion for judgment on the administrative record. In its ruling, the Court found that the government had adequately justified its basis for combining loan servicing and collections and that NextGen did not per se violate the FDCPA or various state laws governing debt collection. Rather, at this stage, the government was entitled to a presumption that it would execute NextGen in a legal fashion and was “not required to set out exact state-by-state engagement strategies.”

The Court also found that the government’s cancellation of a prior solicitation of collection services under NextGen was not arbitrary and capricious.

Unless it is appealed, the Court’s ruling in FMS Investment Corp. v. United States paves the way for NextGen to move forward. It remains to be seen how the government will address the consumer protection concerns raised in this lawsuit as NextGen is implemented.