ED Debt Collectors Only Bright Spot as Federal A/R Nears $1 Trillion

Nick Bernardo

I’m not big on sequels generally, but I felt now would be the right time to pen a follow up to the piece I wrote last October, Why Dept. of ED Collection Contract Outperforms on Taxpayer ROI, since the Federal government’s largest purchaser of collection services, the Department of Education (ED), is days away from starting a procurement for Private Collection Agencies (PCAs).

With protests of Federal contracts on the rise, student loan debt burgeoning to the point of The Daily Show’s recent lampoon, and the Office of Inspector General paying more attention than ever to the ED PCA contract, there’s never been more at stake at ED’s Default Resolution Group, the agency’s arm that runs the private debt collection program. How they select their new crop of debt collection vendors over the next several months will not only determine whether or not implementation of the new contract (or “task order” in ED-speak) will be delayed by protest, but also whether their vendors will be able to maximize the percentage of dollars returned to public coffers while successfully navigating the regulatory and legal minefield the collection industry has become.

In a report published by the Department of the Treasury in March of 2013 and available as a free download here, we see that the total amount of Federal, non-tax receivables have increased by 19.7%, comparing fiscal year (FY) 2011 to FY2012, or more than $153.3 billion in raw dollars, for a grand total of $931.1 billion.

Due to provisions in The Affordable Care Act of 2009 making ED the direct lender of future Federal student loans, ED’s total receivables are on the rise, up by 27.5%, from $504.7 billion to $643.3 billion, and its delinquent dollars are up too, an increase eclipsing $120 billion, and a percentage rise of 30.5% compared to U.S. Fiscal Year 2011. Likewise, ED student loans now represent a greater share of all Federal non-tax receivables, up from 65% to 69.2% over the last year, and the lion’s share of non-tax delinquencies, or 74% what’s past due as of the end of Fiscal Year 2012.

But what really jumps off the page in a sea of data contained in the Federal report is that, while recoveries are down overall on a government-wide basis, from $245.3 billion to $239.9 billion, and while they are down at ED overall by 3.9%, ED’s PCAs were and remain the bright spot by virtue of the fact that they collected 11.3% more in FY12 compared to FY11.  Their results went up, while others only decreased. The increase represents $300 million in raw dollars, or 30,000 additional $10,000 student loans resolved.

Put another way, although dollars collected by PCAs are not funneled the next day to new borrowers, this increase could conceivably help fund every single one of the record 30,369 people who applied to attend the University of Chicago this year, a fact which should please anyone with connections to the Windy City (Are you reading this, Mr. President?).

So PCAs have done a very good job for taxpayers in an environment in which there is greater public awareness of the albatross into which student loans have morphed, an environment in which they have been forced to deal with an extremely complicated systems conversion that has required them to make do with the risk associated with estimated payments and the attendant additional scrutiny of already highly-scrutinized operations.

The task of keeping the looming procurement on track and thereby maximizing the recoveries flowing back into public coffers, especially by avoiding one or more protests, will not be an easy one for ED. One major pivot point in this regard relates to the types of companies ED may encourage to bid by virtue of any minimum requirements and past performance baselines an organization must surpass in order to be considered for an award.

Historically, ED has hired “the best of the best” companies with collections as their core competency, those able to document proven, competitive performance (the sole exception being the instance mentioned in the original October op-ed cited in the first paragraph).

The Federal report summarized above validates the wisdom of ED awarding its task orders to highly competitive, highly compliant collection agencies.  Whether they will do the same again in 2013, or whether they will cast a wider net to enable guaranty agencies (GAs) to try to compete with collection agencies on a collection contract, may play a role not only in whether the procurement proceeds uncontested, but also whether the PCA program will be able to deliver to taxpayers, over the next decade or so, the historical performance levels collection agencies have been proven to deliver.

One higher education finance industry insider recently brainstormed with me about how this all may play out.

“Knowing that GAs historically rely on collection agencies for their own performance numbers, how would GAs then draft an argument in an offer to ED urging their selection over those firms on which their own numbers depend? Who would GAs use as references for collection services besides themselves or ED?”

One might project the selection of GAs for the PCA task order may result in those GAs simply farming out much of the work to collection agencies anyway.  But wouldn’t that be tantamount to introducing a middleman to the process at odds with the very concept of reducing the cost of borrowing for students envisioned in 2009 when banks were cut out as middlemen in the loan origination process with one stroke of President Obama’s pen?

These are good questions ED will have to answer.  Other pivot points in the procurement depend on whether ED will turn over any of its current PCAs (which I would speculate would almost guarantee a protest), promote some or all of its small businesses into the “unrestricted” vendor pool of larger companies, or what the economics of the contract may look like a few years from now if the profitability of the endeavor continues to erode.  Will the ever-increasing costs of compliance and downward pressure on margins be such that some PCAs may reduce investments geared to future performance, or even opt out of the contract altogether, reducing recoveries that can be relent to future generations of students?  On this point and others, only time will tell.

Nick Bernardo is president of Net Gain Marketing, Inc. (NGM), a marketing consulting and information services firm based in Collingswood, New Jersey, in the greater Philadelphia region. Practice areas for the firm include government contracting consulting, information services through MyGovWatch.com, RFP/RFI and proposal development consulting, website and multimedia design, email marketing, print brochure development, public relations, presentations and public speaking, and technology solutions. Nick is also president of the board of trustees of ARMing Heroes, a charity devoted to helping military veterans with financial problems and job opportunities.