More small private collection agencies are getting the opportunity to work on the sought after U.S. Department of Education (ED) private student loan collection contract.

As of July 31, 2011, at least 14 of the 17 unrestricted private collection agencies had established a sub-contracting arrangement with a small business to increase the education department’s collections on defaulted loans, said an education department spokesman. Come October 1, ED will begin using the collection contributions of small businesses when awarding points to contractors in the quarterly performance competition.

Federal government agencies encourage all of its contractors to subcontract with small businesses whenever reasonably possible. Each contractor must decide if they want to participate. To increase the chances that subcontracting will happen on the latest student loan contract, the education department included a clause in the 2009 debt collection contract that provides incentives to the largest private collection contractors who comply with the directive and disincentives for those who do not. The clause applies only to unrestricted contractors because the group works on 88 percent of the education department’s delinquent student loan debt. There are a total of 22 collection agencies official on the contract, 17 in the unrestricted category and five in the small business category.

At the end of December, agencies that subcontract work will be eligible to earn up to five additional points during the quarterly competitive performance evaluation if their small business subcontractor is doing collection work based on the contract’s operational requirements, said the education department spokesman. Agencies that do not subcontract may lose up to 5 points during the performance evaluation. A firm’s overall score on the performance evaluation determines how many accounts an agency is awarded during the next distribution cycle.

Unrestricted contractor CBE Group said it brought in its subcontractor, Value Recovery Holding, to collect on the defaulted student loan debt at the beginning of the latest contract.

“They possessed a level of state and federal collection experience that gave them a working knowledge of government contracts and added value to our alliance,” said Scott Blanchard, CBE Group’s executive vice president.  “Today, CBE is far exceeding ED’s subcontracting goals.”

The education department said a firm can bring on new subcontractors at any time during the contract and many agencies proposed subcontracting relationships prior to the contract award, while some did so soon after. But adding a subcontractor to the contract isn’t as simple as finding an agency with a good collections record. Subcontractors must meet the same software and security requirements as official contractors who answer directly to the education department. Such an investment – millions in many cases – is difficult in good economic times. Nowadays, many small agencies are facing less liquidity and less favorable borrowing options.

Value Recovery, of Columbus, Ohio, received some investment help from CBE Group.  “We have made financial investments and provided many ancillary services to assist not only in VRH’s compliance, but also their effectiveness,” Blanchard said. “Throughout our partnership with VRH, we have also provided management, extensive training, and use of CBE’s proprietary collection system.”

The education department hopes that with more agencies working on the 2009 contract, collections will improve.

“Our estimates for collections in fiscal year 2011 still show that we will have an overall lower recovery rate, which is lower than the Department had hoped,” the spokesperson said.

The spokesperson said the education department has made some contract changes that it believes will increase the collection rate for fiscal year 2012 and beyond. Those changes include a slight increase in the commission paid to agencies, with the expectation that the pay increase will increase recovery rates. The department also will stop giving a resolution point to contractors that find borrowers who have filed for bankruptcy.

The spokesperson said the department has built a process that does administrative resolution processing work at a reduced cost than what was being paid to the private collection agencies.

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