A Government Collection Contract that Can Change an Agency Forever

Eight years ago Continental Service Group, Inc. (ConServe) set out to become an unrestricted contractor for the U.S. Department of Education (ED). It is a lofty goal worthy of pursuit given its potential rewards.

ED says its Federal Student Aid (FSA) program is the equivalent of the 9th largest bank in the U.S., with a loan portfolio in excess of $100 billion. It can provide more than $50 billion in financial aid every year to postsecondary students, including more than $30 billion in new loans and more than $7 billion in Pell Grants. Snagging a federal student loan contract with ED can significantly boost a company's collection portfolio and its visibility, setting contract winners on the path to exponential growth.

In January, Fairport, N.Y.-based ConServe reached its goal, being named one of 17 unrestricted contractors tapped to help the FSA collect billions in delinquent student loans ("ED Announces Debt Collection Contract Winners in Unrestricted Category," Jan. 9).

“It’s very rewarding to have a long term goal come to fruition,” ConServe’s CEO Mark Davitt told insideARM.

Coast Professional, Inc. (Coast) COO Everett Stagg echoed those sentiments. In March, the company learned it was one of four new small business contractors selected for the ED contract ("Department of Education Names Small Business Collection Contractors," March 11), which could significantly boost the company’s revenues and client portfolio over the next few years.

“You will have an opportunity to work with other high profile clients if you do a good job. And you have the ability to expand,” Stagg said.

That has certainly been ConServe’s experience. The company has worked in student loan debt collections since 1985, but mostly on a regional level before receiving its first ED contract in 2004. Davitt expects ConServe’s new four year contract with ED will help take the company to a whole new level in the student loan collection space.

ED’s 17 unrestricted ED contractors will work 88 percent of the ED’s delinquent student loan debt. And because placements are competitive and performance based, the better a company performs the more business it can earn.

“Our goal is to be the top performer on this contract,” said Davitt, who added that ConServe had to demonstrate it had the financing backing to support the business growth the contract brings.

ConServe’s competition includes heavyweights NCO Group. and Pioneer Credit Recovery, Inc. Conserve has already demonstrated it can deliver on the contract; the company obtained the ED’s top performance ranking and has been the ED’s top rated agency among small business contractors.

Davitt said the visibility and ConServe’s new status as an unrestricted ED contractor helped it recently win new business with some state student loan guaranty agencies. He said the company’s 310 employee base could grow to as many as 600 over the next two years.

“The federal contract is so public and open. People can see what’s going on and how performance has been,” Davitt said. “It’s better than a sales person saying we’re doing a good job when you can point to public records saying we’re doing a good job.”

Stagg agreed saying the ED contractor presents huge opportunities and huge risks for small agencies. The Anaheim, Calif.-based company is preparing for growth.

In August, Stagg – along with partner and Coast CEO Brian Davis -- will open a new facility in Geneseo, N.Y. and hire workers that will help work the ED contract and handle new business when the company is ready to expand. He said Coast could potentially employ as many as 250 workers at its offices in West Monroe, La. and Geneseo just to support the ED contract.

But as quickly as an ED contract can elevate an agency’s revenue and stature in the student loan space, it can lead to a company’s downfall if the operations and performance isn’t managed well, Stagg said.  Coast will have invested about 12 months of preparation and $2 million in security and software before it even begins collecting on the ED contract this fall, Stagg said. Some of the financing will come from Coast’s cash reserves. But the size of the investment, due to new security requirements, could mean that ED contractors will operate in the red a lot longer than prior ED contracts, Stagg said.  

Account Control Technology, Inc. (ACT) president Donald Taylor agreed that an ED contract is an award that doesn't' come cheaply.  Because of the new security requirements, he estimates it could take ED contractors as much as 24 months to break even.  

But the eight year relationship has benefitted the company, headquartered in Canoga Park, Calif. ACT went from 40 employees when it won its first ED contract in the small business category in 2000 to about 250 today as the company won ED volume and won new business from state guaranty agencies, colleges and universities, Taylor said. And, like ConServe, the company was moved to the unrestricted ED contract this year. Taylor said ACT's new unrestricted contract will likely mean staff will increase 100 percent.
 
"From our perspective, you make such a large investment, but it's a bet on the future," Taylor said. "It's the single largest contract in the country."

Given the enormity of the changes and Coast’s commitment to perform well for the ED and its existing customers, the company will not pursue any new business in the next two years, Stagg said.
 
“Something that makes you laugh can make you cry if you don’t do it right. I know of several companies that have had an ED contract that are no longer in business,” Stagg said. “Failure is not an option.”