Student Loan Market Enticing but Competition is Fierce

The following article is an excerpt from a research paper on the upcoming student loan collection contract for the U.S. Department of Education from Kaulkin Ginsberg Consumer Finance Analyst Dimitri Michaud. Read a full executive summary of the research report here. The report is also available for purchase in the insideARM bookstore.

The federal government is increasingly using private collection agencies (PCAs) to rehabilitate and collect delinquent debt. In addition to the Internal Revenue Service’s use of PCAs in the collection of unpaid taxes, the Department of Education (ED) has continued to expand its use of PCAs in the collection and rehabilitation of its portfolio of defaulted student loans. Given that ED’s portfolio of defaulted student loans stands at over $40 billion, the need for private agency participation in servicing these loans will continue to grow.

The student loan collection market itself has seen rapid growth, having increased at an 8 percent to 10 percent rate annually over the past several years, compared with the accounts receivable management industry’s compound annual growth rate of 4 percent since 2000. A recent Kaulkin Ginsberg sizing of the student loan collection market put it at $974 million annually.

Although the market has grown quickly, it is concentrated among a handful of major players, with 10 companies and their subsidiaries controlling an estimated 75 percent of the sector.

These major players also hold an advantage when competing for a position in the General Services Administration (GSA) schedule, a requirement for any firm seeking to collect ED debt. Small- and mid-size firms seeking to participate in the “small business” category need substantial upfront capital, ranging from $1.5 million to $2 million. Those in the large “unrestricted” pool will require incrementally larger amounts. These capital requirements are important to keep in mind, as agencies on the GSA schedule do not break even on initial capital outlays for 18 months, and do not see profits for 24 months, according to representatives from the Department of Education.

But with over $2.3 billion dollars collected by agencies on the GSA schedule in 2007 alone, and ED having paid out over $300 million to its agency contractors for the year, enthusiasm about contract expansion in the summer of 2008 is warranted.

While the benefits of securing an ED contract have been likened to winning the Super Bowl, it is important to keep in mind that the availability of GSA work is very limited. For those that want to enter the student loan collection market, opportunities can be found not only among the collection of federally-backed student loans, but within other segments of the market.

These include campus-based collections and private student loan collections. Considering the 33 percent compound annual growth rate in private student loans over the last 10 years, this piece of the market will present many opportunities. Additionally, many smaller agencies, and those unable to obtain ED contracts, will find growing partnership opportunities as subcontractors to help agencies on the GSA schedule achieve their collection goals.

While barriers to entry do exist, the student loan collections market, with its varied segments and high average collection fees, remains a profitable opportunity for ARM companies relative to other types of receivables management.

To download a free executive summary of Dimitri’s latest research report on the federal student loan collection market, please visit www.insidearm.com/go/top-5-ffel-considerations.