There are few winners in America's trillion-dollar student debt crisis. The government has become the guarantor of a giant pool of increasingly bad debt, low-income borrowers are saddled with decades of repayments, and taxpayers foot the bill. The class of 2014 was the most indebted in history.
But at least one industry is making money off of the crisis: the debt collectors that the Education Department pays to service and collect on federal student loans.
Payouts from the Education Department to private debt collectors topped $1 billion in 2014, the National Consumer Law Center reported. And business is booming — by 2016, the center said, it will have doubled to $2 billion.
"There's just an explosion of the amount of loan debt. Default rates are incredibly high, and federal loans are very hard to discharge in bankruptcy," said Persis Yu, an attorney with the National Consumer Law Center, in an interview with BuzzFeed News. "There's a lot of opportunity for these companies to get new accounts."
Swelling debt levels — and debt delinquency — mean a major headache for the Education Department: how to adequately oversee the private companies that deal with the growing portfolio of loans made with taxpayer dollars. The billion-dollar debt collection industry is only a piece of the puzzle; the department also pays private companies to service its federal loans, making sure nondelinquent borrowers keep paying on time.
The debt collectors don't always live up to what the Education Department expects of them, and their drive for profit is often at the root bad behavior. The department recently said it had ended contracts with a group of collectors after they misled borrowers about ways they could get out of default. Though the Education Department did not specify motive, the NCLC report found debt collectors failed to help borrowers negotiate affordable loan payments because they wanted to maximize their payout under the Education Department's contracts.
Christy, a borrower quoted in the NCLC report, said that she had been told by her debt collector that if she wanted to rehabilitate her loan, her monthly payments would be based on her loan balance, not her income, and that there was nothing she could do to lower her payments. When she asked about the income-based repayment plan she had heard about, she was told her loan was ineligible, because it had been consolidated.
Those were all misrepresentations. Christy was, in fact, eligible for income-based repayment. But at the time, her debt collector would have been paid just $150 if she had enrolled in income-based repayment, compared with a hefty 13% commission if she made the higher payments. The department later made changes to their contracts, hoping to change those practices.
"If I could have rehabbed this loan making regular payments based on my income, I would have done so many years ago," she told the NCLC. "Now the loan went from $70,000 to $170,000."
For years, Pioneer Credit Recovery was one of the Education Department's star debt collectors, sitting near the top of the department's rankings of 22 agencies. It raked in millions in performance bonuses for successfully chasing after student loan debtors who had defaulted on their payments. In 2014, Pioneer generated $65 million in revenue for its parent company, the former Sallie Mae subsidiary Navient Corp.
But an internal Education Department review found Pioneer had been misleading borrowers at "unacceptably high rates," leading the mostly poor students to miss out on benefits that would have made it easier for them to pay back their loans. Late last Friday night, it was one of the companies the department said it was cutting ties with, alongside four other debt recovery agencies that had misled borrowers.
Pioneer said in a statement it had been "blindsided" by the announcement. The Education Department also promised to step up oversight of the 17 remaining debt collectors it contracted with.
Some observers called the department's move to suspend Pioneer and other debt collectors' contracts long overdue: Experts had been sounding the alarm about the agencies for years, saying that they violated borrowers' rights in the pursuit of profit. Three separate 2014 reports by the Government Accountability Office and the Office of the Inspector General, as well as the NCLC, found that the department's oversight of debt collectors was inadequate and had opened the door to a litany of abuses.
One of the most troubled debt collection agencies, NCO Group, was not among the groups terminated, despite paying a $3.2 million penalty to the FTC in 2013 for consumer violations. NCO Group, the FTC's complaint alleged, called borrowers three or four times a day, at all hours of the day, "with the intent to annoy, harass or abuse." They allegedly harassed borrowers at their workplaces, even after they had been told the calls were forbidden, and promised to remove numbers from their call lists, only to call again repeatedly. In 2011, NCO received the department's highest bonus.
The Education Department's rankings, which put Pioneer first and another agency it cut ties with, Coast Professional, third, also prioritized profit. In ranking its debt collectors, the department took into account only the amount that agencies had collected for them, without taking into consideration consumer experiences, according to a representative from the Education Department. Bonuses are paid out to collectors based on those rankings — which is how Pioneer Credit ended up with the government's biggest bonus, almost $6 million, in 2012.
Though the department said last week that it would step up oversight of debt collectors, a representative would not answer whether or not it planned to change the profit-based criteria it used to rank agencies and pay out bonuses.
"The Department of Education's rankings are misaligned with borrowers' interests," said Persis Yu of the NCLC. "We see it as putting profits above anything else."
Yu said she was "cautiously optimistic" about the department's moves to step up oversight of debt collectors. "It shows they're moving in the right direction."
The private companies that the department pays to service student loans that are not yet in default are also vitally important, said Rohit Chopra, of the Consumer Financial Protection Bureau. When it comes to federal loans, servicers are the step before debt collectors: They handle those who are paying their loans on time or who have missed only a few payments, and it is their job, Chopra said, to enroll borrowers in programs like income-based repayment, intended to keep people out of default.
Navient, which owns Pioneer Credit, gets more than $100 million from servicing federal loans, a number that it said in an earnings filing was only expected to grow. Navient and Sallie Mae, which it spun off from last year, agreed to pay $139 million to settle allegations by the Department of Justice and the FDIC that it misled and overcharged active-duty soldiers, many of whom were stationed in Afghanistan and Iraq.
The department recently renewed its contracts with all of its student loan servicers, including Navient.
The vast majority of students who go into default on their federal loans, running afoul of debt collectors, are not those with huge outstanding balances, like graduate students who rack up hundreds of thousands in debt. Instead, they are usually poor students with small outstanding balances, according to Federal Reserve data — many of them students at for-profit colleges, or those who dropped out after only a semester.
Mellissa Deleau, of Altimont Springs, Florida, paid $19,000 for a degree at Everest College, a for-profit school that was later shut down by the government in the wake of a long list of investigations. After a year and a half of looking for a job, Deleau, a mother of five, went into default on her loans, unable to make the payments after leaving an abusive marriage.
Then the debt collectors began to call. "They blew up my phone," she said. "They call me constantly. I don't answer anymore."
NCO Group's contract was not among those terminated by the Education Department, but it has not yet been renewed. An earlier version of this article said that it had been renewed.