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Guest Post: Government Secrecy on Student Loan Collections Hurts Borrowers

Published:  April 15, 2013

By Deanne Loonin

President Obama has committed his administration to achieving new levels of openness in government. When it comes to the Department of Education, however, there appears to be far more “talk the talk” than “walk the walk” in these efforts and the “new era” of open government looks a lot like the old way of doing business.

This disappointing record has serious implications for student loan borrowers and their advocates as basic information about Department of Education policy is harder than ever to obtain. 

Take, for example, the Department’s policy regarding the commissions it pays student loan collection agencies.

In June 2010, the Department pulled its manual outlining acceptable collection agency practices` off-line. Department officials made the handbook disappear apparently because they were concerned that government collection efforts could be compromised if borrowers learned of the options available to them for settling their debts.

The handbook provided information on much more than just settlement options. For example, it also included guidance about the incentives the Department provides collection companies through its complex commission system. At the National Consumer Law Center (NCLC), we have written for years about how this commission structure works to the benefit of collectors, rather than borrowers, and in many cases encourages collectors to violate the Higher Education Act.

The Obama Administration has recently taken notice of this problem and made some important changes. But while some of these changes occurred openly during the negotiated rulemaking process, others were made behind closed doors, and despite repeated requests, have not been made public.

This lack of transparency makes it nearly impossible to have a knowledgeable debate about the true costs and benefits of the current collection system. Is it possible that the Department doesn’t want the public to know how much money goes to private debt collectors or how federal polices have encouraged collectors to pressure borrowers into payment plans that are not in their best interests? Or that in some cases, collectors fail to counsel borrowers on options to which they are legally entitled?

To help us understand the current system, NCLC sent a Freedom of Information Act (FOIA) request to the Department last August. Despite the time limits (generally 20 days!) on responding to FOIA requests, we have not yet received any substantive responses.

Among other information, we requested all policies, public statements, handbooks, guidance and similar documents concerning:

  • Fees paid to private collection agencies for Direct Loan rehabilitations and consolidations,
  • Criteria for sending defaulted loan accounts to the Department of Treasury for offset,
  • Factors used to determine whether collection fees will be added to loan balances and formulas used to calculate fee amounts,
  • Information about litigation criteria, and about the hiring of private law firms to litigate defaulted student loan accounts, and
  • Studies and research about the rates at which borrowers re-default on their loans after rehabilitation and consolidation.

In March, Bloomberg reported that the Department slashed the commissions it pays collection agencies. According to the article, the Department previously paid a commission as high as 16 percent of the entire loan amount only if collectors convinced defaulted borrowers to make stiff monthly payments. But a copy of a new contract Bloomberg obtained through a FOIA request revealed that the Department has reduced the fee to as low as 11 percent, no matter the size of the payments.

We are certainly pleased that the contracts do apparently exist and that the media is reporting on them. But the actual policies are still not public. This doesn’t do much for borrowers seeking to get more information so they can enforce their rights.

Our big picture concern is that the Department appears to be making policy outside of the public eye and then refusing to open up about it. Department officials have told us a number of times that the changes they have made regarding incentives for servicers and collectors are “proprietary.” Even if these changes are favorable to borrowers (and they are in some cases), the public doesn’t know about them and apparently can’t find out. 

We understand that these are complex issues, but we can’t get anywhere if the government refuses to let the public know what is going on. According to a director of the National Security Archive, “Bureaucrats are able to deter a lot of citizen engagement.” That’s for sure and it harms all of us.

Deanne Loonin is a staff attorney with the National Consumer Law Center and the Director of the Center's Student Loan Borrower Assistance Project. She focuses on consumer credit issues generally and more specifically on student loans, credit counseling, and credit discrimination. She is the principal author of numerous publications, including “Borrowers on Hold: Student Loan Collection Agency Complaint Systems Need Massive Improvement.” Her views are her own and do not necessarily reflect those of the New America Foundation.

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