New FSA Student Loan Default Report Raises Many Questions

Last week Federal Student Aid (FSA), an office of the Department of Education, released a series of quarterly reports reflecting activity through December 31, 2015. The reports cover the Federal Student Aid portfolio, including information such as outstanding balance by loan type, application submissions, and default status.

Newly introduced this quarter is a New Direct Loan Default report, which looks at the number of borrowers and the outstanding balance of loans entering default during the quarter. The report also provides a breakdown of those loans defaulting for the first time versus re-defaults. Because the report is new, FY2015 is the first year for which data is available, so there is not a long term view of this information. It does show a slight decrease in the percentage of borrowers who defaulted for the first quarter of FY2016 versus the first quarter of FY2015 (2.3% vs. 2.5% respectively).

In December 2015, Federal Student Aid posted its first quarterly default recoveries report to the FSA Data Center. The Default Recoveries by Private Collection Agency report details the dollar amount recovered by each private collection agency.

During the quarter ending December 31, 2015, the Department recovered more than $2.2 billion in defaulted student loans through its private collection agencies. More than three-fourths of the recoveries were due to rehabilitations; nearly 10 percent due to consolidations; 8 percent due to wage garnishments; and almost 4 percent voluntary payments. The report does not include collections on defaulted student loans through the Treasury Offset Program (TOP) as private collection agencies are not involved in the TOP process.

There are 23 firms whose placements are reflected on the report; some that are still on extension from the 2009. Of the 23, eleven firms received additional inventory between October 1, 2015 – December 31, 2015: five large agencies, and six of the eleven small business collectors awarded contracts in October 2014.

Below are the eleven firms that received placements. Click here to see the data on all 23 firms.

insideARM Perspective

This data raises a number of thoughts and questions. Here are a few:

First, FSA data which says that delinquencies have decreased contradicts data for the same period from the Federal Reserve Bank of New York, whose stats show that the 90 day delinquency rate has risen.

Second, although the Department of Education has said it will no longer publish competitive data on the PCA contract (and hasn’t done so for a few years now), it seems at least some of the information is still being collected. The chart in the link above provides gross collections. However to reproduce the old reports, one would also need to know administrative resolutions, and accounts serviced (those for which a payment was received) – neither of which are provided in this current data.

Third, as the industry has been saying for some time, in order to establish a fair comparison of recovery results, accounts must be delivered to agencies on the same day. This is not what is currently happening, which may be one reason the competitive data is not being released.

Fourth, the small contractors have received almost as many accounts as the large contractors. While it’s too early to tell from recovery data, one may wonder how a smaller firm could digest such a significant number of accounts, compared with larger firms that have made the massive investment required to do so.

Fifth, the executive summary excerpted above notes that more than three-fourths of the recoveries were due to rehabilitations. This suggests it’s possible that collections could go down in the future, as loans are only eligible for rehab once.

On a related note, also out today is research from Junior Achievement and Voya which finds that two-thirds of teens see borrowers, not government, as responsible for paying off student loan debt.