Education Dept. Blocked From Canceling Debt Collection Contracts

September 18, 2018

A federal court last week blocked the Education Department's plans to cancel contracts with debt collection firms handling defaulted student loans.

The decision to drop the debt collectors was part of a broader overhaul of loan servicing pursued by the Office of Federal Student Aid. But Judge Thomas Wheeler of the U.S. Court of Federal Claims found that the department's justification for canceling the contracts was "slipshod" and that its alternative -- a plan to offer more enhanced servicing to borrowers before they default -- included scant details.

The department had begun to notify debt collectors earlier this summer that it would pull and reassign existing defaulted student loan accounts. But it quietly postponed those plans after separate congressional spending bills included language directing the department to extend contractors with debt collection firms.

The judge's decision means the debt collectors will continue to play a part in loan servicing as the department moves forward with plans for its Next Gen loan servicing system.

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