In Fed Debt Opps’ most recent podcast and corresponding article, Randy Kamm, co-founder of Fed Debt Opps, summarized the latest events surrounding the U.S. Department of Education’s (ED) ongoing (and tumultuous) effort to successfully conduct its procurement and source selection of service providers who will deliver systems and business services under its Next Generation (NextGen) Financial Services Environment. The procurement supports ED’s Office of Federal Student Aid’s (FSA) redesign of its federal student aid delivery, servicing, and post-default collection system.

On December 14, in response to the latest round of protests and lawsuits brought by various student loan servicing organizations and private collection agencies (PCAs), ED again changed course and cancelled its latest phase of this procurement, announcing it intends to reissue a new solicitation on January 15, 2019.

ED’s cancellation resulted from U.S. Federal Claims Court Judge Thomas Wheeler’s December 4 directive, where the Court upheld the protesting companies’ complaints. The Court directed ED to take corrective action to address issues raised by protesting servicers and collectors:

  • Student loan servicers successfully argued that ED changed the scope of the solicitation’s requirements by improperly moving business operations from one part of the procurement to another, thereby violating federal appropriations language.
  • PCAs, as part of their ongoing five-year battle (and numerous lawsuits) with ED over defaulted student loan collection contracts, successfully argued that they were denied an opportunity to compete for a central business function that they’ve been providing for nearly four decades.

By cancelling the procurement, revoking the Phase I awards made in October to 12 companies, and agreeing to issue a “new solicitation (or multiple solicitations)” using a “full and open competition”, PCAs and other servicers will, according to ED, now have “a fresh opportunity to participate in the solicitation for support across the student aid lifecycle”. Generally, this is appears to be good news for PCAs.

However, when we step back and analyze ED’s announcement, many questions arise:

  • What, if anything, will ED reissue on January 15? Will ED simply tweak its Phase I language or rethink and better define the NextGen servicer concept, including the role of PCAs in the future?
  • Should we expect ED to now reverse course and include the services of PCAs by adding collection services to this solicitation? If so, what did ED mean earlier when it previously declared that the services of PCAs would no longer be needed in the future due to ‘enhanced delinquency’ servicing?
  • If the ‘enhanced delinquency’ model is implemented, how might ED incorporate component functionality employed by PCAs, such as skip-tracing and other highly specialized skill sets routinely employed to resolve delinquent debt? Will the current servicing cost model, based on a per-account flat-servicing fee, support collectors’ performance-based, contingency fee model?
    How will ED resolve the differences in the financial model of servicers and PCAs?
  • Will ED require its IT platform and other prime contractors to meet small business subcontracting participation goals?
  • Given ED’s bumpy history of past procurements and system implementations, how long will it take for ED to successfully conclude the procurement and effectively implement the NextGen platform? Do answers to these questions have implications for existing small business (i.e., restricted) debt collection contractors? What does this transition look like?
  • How will ‘enhanced delinquency’ servicing and post-default debt collection functions be impacted by federal debt collection laws?

The eventual conclusion of ED’s source selection will depend on how effectively ED addresses these and other important procurement, implementation, and funding questions. But a more fundamental question remains unanswered: How should administration of the federal student loan programs be configured? 

The primary characteristic of the program is it’s a dynamic, active, and growing inventory of more than $1.5 trillion dollars with roughly $150 billion in defaulted debts underwritten by taxpayers that must be managed closely and carefully. ED’s NextGen system design (and procurement process) has not credibly addressed how it plans to manage its bad debt; one of the largest and most complex consumer credit programs in the world. Its inventory has accumulated over the past forty years and is growing at roughly 13.1% each year, on average, since 2000.

Post default collection agencies perform an essential function that helps ensure the federal fiscal interest is protected. Student loan collectors conduct millions of ‘crucial conversations’ on a daily basis as they work to help defaulted students get back on their feet and protect taxpayers’ investment in education. Collectors operate highly specialized, performance-based account recovery and delinquency resolution services. These ‘high touch’ services differ significantly – both in function and cost structure -- from routine due diligence-based servicing, best characterized as a records management system and ‘letter and phone call’ servicing model – not a debt collection management system.

PCAs’ role and function in the future NextGen environment may not resemble the same configuration as it has in the past. But, let’s hope federal policy makers will see the value and accountability role these service providers play in the sound management of the federal student loan programs. Let’s look forward to a day in the near future where a robust network of highly qualified PCAs – encompassing both large and small business providers – may once again play a central role helping manage this important program. Let’s hope federal student loan collection firms are finally nearing the end of the disruption they’ve encountered over the past several years.

Will ED address these vital questions in the next version of the NextGen RFP? These are fundamentally important policy questions, so far unanswered by ED. By any standard, any plan to responsibly operate the federal student loan programs must include a blueprint to manage the recovery and resolution of defaulted assets. ED’s January 15 update must include a role for PCAs.

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