U.S. Cuts Off Student-Loan Collectors for Misleading Debtors

(Bloomberg) -- The U.S. Education Department, citing “inaccurate representations” to student-loan borrowers, will end debt-collection contracts with Navient Corp. and four other companies.

Representatives of these companies, which pursue students who default on their loans, made misleading statements about programs that help borrowers get back on track, the agency said in a statement late Friday. The companies include Pioneer Credit Recovery, a unit of Wilmington, Delaware-based Navient, which was split off last year from SLM Corp., commonly known as Sallie Mae, the largest U.S. education finance company.
“Federal Student Aid borrowers are entitled to accurate information as they make critical choices to manage their debt,” Under Secretary Ted Mitchell said in a statement. “Every company that works for the Department must keep consumers’ best interests at the heart of their business practices by giving borrowers clear and accurate guidance.”

The government turns to 22 debt-collection companies to put the squeeze on borrowers who are defaulting on their loans. In 2012, Bloomberg News reported that the private contractors chasing these debts collected about $1 billion annually in commissions and faced growing complaints that they were insisting on stiff payments, even when borrowers’ incomes make them eligible for leniency.

‘Huge Step’

Pioneer said in a statement that the Education Department has conducted 17 exams since the beginning of 2014, listening to 600 phone calls, and had not raised concerns about the company’s rates of inaccurate or misleading information to borrowers. In April, it received written confirmation from the agency that its policies complied with regulation.
“We were blindsided by the Department of Education’s actions,” Pioneer said. Navient’s revenue from collecting for the Education Department totaled $65 million last year.
The agency said it will “wind down” its contracts with the five companies and transfer their business to other agencies with contracts. The four other companies losing contracts are Coast Professional, Enterprise Recovery Systems, National Recoveries and West Asset Management, according to the statement. Those companies couldn’t be reached for comment after business hours.
“This is a huge step forward for student loan borrowers who are too often the victims of dishonest debt-collection practices,” Maggie Thompson, campaign manager for Higher Ed, Not Debt, said in a statement. “We are happy the Department of Education protected borrowers by ending the contracts of some of the most abusive debt collectors in the business.”
The companies made “materially inaccurate representations to borrowers” about the government’s loan rehabilitation program, which can get former students back in good standing after making nine on-time payments in a 10-month period.
The companies gave borrowers misleading information about “the benefits to the borrowers’ credit report” and about “the waiver of certain collection fees,” the agency said.
The government said it will provide enhanced monitoring of all agencies’ compliance with federal debt collection law.
To contact the reporter on this story: John Hechinger in Boston at jhechinger@bloomberg.net