WASHINGTON -- The U.S. Department of Education said Friday it will end contracts with five companies that collect defaulted federal student loans after finding they made “materially inaccurate representations” to struggling borrowers.
The agency said it was winding down its debt-collection agreements with Navient-owned Pioneer Credit Recovery, as well as Coast Professional, Enterprise Recovery Systems, National Recoveries and West Asset Management.
Those companies are among the 22 collection agencies that the department hires to pursue borrowers who have fallen behind on their loan payments.
The five debt collectors being terminated, the department said, provided borrowers with “inaccurate information at unacceptably high rates” about the benefits of a federal program that allows borrowers to get their loans out of default.
“In particular, these agencies gave borrowers misleading information about the benefits to the borrowers’ credit report and about the waiver of certain collection fees,” the department said in a statement.
Friday’s announcement comes as the department has faced growing criticism for its oversight of the various federal contractors who manage its $744.3 billion portfolio of direct student loans.
Aside from complaints by student advocates, consumer groups and some Democratic lawmakers, the agency’s own inspector general has taken department officials to task for not doing enough to monitor those contractors.
Last year the inspector general said that officials were not “effectively” making sure that the debt collection companies were following the law. And in May 2013, the inspector general found that the department was paying out bonuses to those companies without first verifying that they had actually been earned.
The department also said Friday that it would provide enhanced monitoring of all of the companies that collect federal student loan debt.
"Federal Student Aid borrowers are entitled to accurate information as they make critical choices to manage their debt," Under Secretary of Education 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."
Crackdown on Navient
The department’s decision is a victory for a collation of student and consumer advocates, unions and some Senate Democrats who have been particularly critical of the agency’s relationship with Navient, which was spun off last year from Sallie Mae.
The company last May paid $97 million to settle allegations by the federal government that it overcharged military service members.
“We are engaged with [the Department of Education] to learn more about their decision and address any questions or concerns they may have,” Navient told investors on Friday.
The company said that it had earned $65 million in revenue under the debt collection contract in 2014 and $62 million in 2013.
Representative Chris Collins, a Republican who represents the upstate New York district where Navient-owned Pioneer Credit Recovery operates, told The Buffalo News that the decision to end the contract would lead to the loss of about 400 jobs at the company.
Navient separately works with the Department of Education to collect and manage the payments of federal direct loan borrowers. The department renewed that loan-servicing contract last August.
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