Education Department Criticized on Student-Loan Collections

The U.S. Education Department must step up its oversight of private student-loan debt collectors, improving the tracking of borrower complaints and changing its commission system to reward customer service, a report found.

Contractors hired by the government to chase defaulted borrowers fail to maintain “fair and efficient” systems to track complaints, according to the report, released today by the National Consumer Law Center, a Boston-based nonprofit advocacy group. The department weighs collection, rather than complaints, too heavily in awarding contracts, it said.

With $67 billion of student loans in default, the Education Department has hired 23 private debt-collection companies to chase borrowers. They include Pioneer Credit Recovery, a unit of SLM Corp. (SLM), the largest student-loan company, known as Sallie Mae. In the year ended in September, the department received 1,406 complaints against the debt collectors, up 41 percent from the year before -- a figure the report said probably understates conflicts with borrowers struggling to repay loans.

“There is a balance between the need to collect student loans and the need to assist borrowers,” according to the report’s authors, staff attorney Deanne Loonin and research assistant Jillian McLaughlin. “At this point, the balance is tilted overwhelmingly in favor of high collections and collection agency profits.”

Companies that collect student loans directly for the department and through state agencies received about $1 billion in commissions last year, according to a review of contracts and agency data.

In March, the Education Department said it was reviewing the commissions it pays collectors and proposed requiring them to let student-loan borrowers make payments based on what they can afford, rather than the size of their debt.

Chris Greene, an Education Department spokesman, said the agency hasn’t had a chance to review the report. Patricia Nash Christel, a spokeswoman for Sallie Mae, didn’t immediately return messages seeking comment.

To contact the reporter on this story: John Hechinger in Boston at jhechinger@bloomberg.net

To contact the editor responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net

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