Earlier this month, the U.S. Department of Education (ED) Office of Federal Student Aid (FSA) announced the results of the lengthy and controversial procurement process for the coveted “Unrestricted Category” of the Debt Collection Services contract.  Seven ARM companies were awarded the contract, raising more questions than answers for industry professionals.  Mike Ginsberg, President and CEO of Kaulkin Ginsberg discussed the results with Federal Government contract expert Randy Kamm, Principal of Collection Quotient Consulting.   Highlights from their candid conversation follow.  The complete version of their discussion will appear on the Kaulkin Ginsberg website.      

Now that the procurement process if finally over, why do you think it took so long?

Theories abound as to why it took more nearly three and a half years to complete this procurement. A combination of factors led to the drawn-out and frustrating process for all parties involved, including PCAs and ED personnel. A few of these factors include:

  • Impact of CFPB and other watchdogs: One cannot overestimate, in our opinion, the impact on ED decision making over the past three years caused by the rise of CFPB’s influence and other public interest groups, not to mention Congressional scrutiny. Increased criticism of ED’s administration of the loan programs by consumer law and public advocacy groups and the media’s drumbeat about increasing and historic levels of student loan indebtedness also caused ED to slow things down.    
  • ED’s lack of internal resources: Federal budget sequestration significantly affected the staffing resources ED had available to manage the procurement process. In addition, vacancies in key FSA management and staff positions led to gaps and voids in decision making which further contributed to missteps and delays.
  • GSA Schedule vs. Open Competition: For whatever reason, ED chose not to continue utilizing GSA Schedule contractors, as it had for more than three decades; it instead moved to a full and open competition. This resulted in a multitude of offerors that required additional vetting.

Are you surprised by the number of participants chosen?

We anticipated that the number of large participants would drop from ED’s 2009 contract that engaged 22 PCAs (17 large and 5 small PCAs) in our recorded podcast back in October.  ED had telegraphed earlier in its Q&A’s that it wanted a smaller, more manageable network. Just as in other collection markets such as financial services, creditors over the past few years have been reducing the size (and cost) of larger networks. In retrospect, it actually should be no surprise that ED was seeking the same kind of control it was observing in other collection markets.

On the other hand, we were more surprised that ED selected 11 small businesses for the restricted procurement back in late 2014. Will all of the small firms be able to accommodate the anticipated volumes while maintaining both financial result and compliance? If you combine the 11 small companies plus the 7 large PCAs, ED’s network is just slightly smaller than the 21 combined companies it had on the 2009 contracts.

How will protests and lawsuits affect the process?

Given the controversial history surrounding this procurement, some observers believe protests or lawsuits might result in the throwing out of this decision and reissuing a new solicitation, forcing a third redux.  Although the courts may have a say in the outcome of any lawsuit, we do not think ED will redo the procurement a third time. It’s important to remember that the government has a 95% winning record on defending itself in protest actions. Secondly, post-award (vs. pre-award) protests are much more difficult to achieve.  ED also has the authority to invoke and take action when it is in the “best interest” of and “most advantageous” to the Government. Therefore, we’re not sure protests or lawsuits will necessarily change the results. We can foresee, however, where ED may add an additional PCA or two, based on the specific underlying principle of an individual protest or suit. We have to believe that the size of the default portfolio and further delays recovering amounts in default will result in ED moving forward with the network it has identified. Will this provide opportunities for subcontracting? It may, but again, the industry will undergo disruption as these arrangements get worked out.   

With the volume of student loans outstanding, are you surprised by the stipulation that the total estimated contract amount is not to exceed $417,100,002.00?

“Estimated Contract Value” is a confusing and misunderstood term.  The government uses a standard formula to derive this figure. It represents an amount the government expects to pay per contractor over the term of the contract, in this case a five-year term. It is not an annual or cumulative value. Based on the $417 million listed in ED’s award notice, the total cumulative contract-wide valuation for all seven contractors equals approximately $3-billion over the first five years of the contract. Given the size of the older outstanding inventory, which some believe equals about 2.5-million accounts, many believe the estimated value listed in the award notice is a low figure.

With the Treasury contract expected to be awarded in Q1 2017, do you think there is any correlation between the timing of this award and the ED selection process?

We find it interesting that three out of the four existing Treasury contractors were not selected by ED for this new contract. Could it be that the four Treasury (or other future Treasury) contractors eventually receive ED inventory through an expansion of the much discussed Treasury pilot program? I’s too early to say, but each of the Treasury contractors have substantial ED experience. As Treasury seeks to expand its role as the nation’s “chief debt collector”, it will be interesting to see if and how student loan collections are transitioned from ED to Treasury. All of this conjecture suggests that collection opportunities with the federal government will only continue to grow, providing a new strategic marketplace for the ARM Industry.

Next Article: Convoke Releases Expanded Debt Validation Features

For more from Kaulkin Ginsberg, visit their blog