Direct Student Lending Program May Lead to Steady Growth for ED Collection Contractors

Come July 1, most students seeking loans to help pay for their postsecondary education will go directly to the federal government thanks to provisions that were included in the historic health care reform bill signed into law last month.

It may be too soon to tell how the changes will impact student loan collection agencies, but industry experts say growth is almost assured for companies participating in the Department of Education’s debt collection contractor program.

“I hate to use a cliché, but when things change, change does create opportunity,” said Mark Davitt, president of Continental Service Group, Inc. (ConServe) of Fairport, NY. The company is one of ED’s 22 collection contractors. “Sometimes it’s not obvious, but if you’re looking hard enough, you can usually find it.”

Federal student loans have more than tripled from $30 billion in 1999 to over $96 billion in 2009. The education department estimates that most college students who borrowed to finance their education have close to $20,000 in student loan debt when they graduate. But with college tuition and fees rising and students having to take out larger loans to cover educational expenses, volume and account balances are likely to continue rise. According to the education department, applications for federal aid increased 20 percent each of the last two years. Meanwhile, the average student loan during the 2007-08 school year was $7,100.

Asked if ED foresaw expanding its debt collection contract program to accommodate the shift to all direct loans, a spokesman said the Department has sufficient capacity to service the projected increase in defaulted students loans resulting from the transition to 100 percent Direct Lending.

Kaulkin Ginsberg Analyst Michael Lamm says that translates into a lot more volume and placements. How fast volume increases, however, depends on the future role of state guarantors of student loans.

The education department said the Federal Family Education Loan (FFEL) program, which is administered by state agencies and commercial banks, had more than $500 billion in outstanding student loans, both current and defaulted loans, as of Dec. 31, compared with the current federal Direct Loan program, which had $160 billion. But the future of collectors who serve guarantors of commercial student loans is more uncertain now that guaranteed federal subsidies for the FFEL program are being eliminated. Although those loans will continue for years, some experts speculate that many FFEL loans will be converted to direct loans if guarantors don’t believe they will be profitable enough to keep.

“That will be an economic decision up to the guarantor,” Davitt said. “If they decide to get out of that guarantee business, it could take place quickly.”

Everett Stagg, president and COO of Coast Professional, Inc., told insideARM that he doesn’t foresee any major impact on direct loan default volume for one to four years. But if change happens sooner than expected, Coast Professional will be ready.

“If needed, we’re prepared to add additional staff,” said Stagg, a veteran of eight ED contracts.

It would appear that ED has been preparing to bring more of the student loan business in-house for several years. Last year, it expanded its pool of collection contractors by five to 22 vendors – the largest number of collection vendors it has had under contract at one time. And all vendors were required to update systems to meet the department’s new security requirements, an investment that took about two years to implement.