Department of Education Severs Ties With Five Debt Collection Companies

The Department of Education took a step in the right direction February 27th when it wound down contracts it had with five debt collection companies that, since 1997, have been hired to do the work of collecting on federal student loan repayments. The contracts were ended because the Department found that the companies—Coast Professional, Enterprise Recovery Systems, National Recoveries, Pioneer Credit Recovery (Navient’s debt collection arm), and West Asset Management—were providing inaccurate information to borrowers at unacceptable rates.

Since borrower counseling is not the specialty or mission of these loan collection companies, this is unfortunately not all that surprising. [See National Consumer Law Center’s report on the government’s relationship with debt collection agencies in the student loan arena, which discusses this inherent conflict in responsibilities.] In this instance, the Department terminated the contracts after concluding that borrowers had been misled regarding the loan rehabilitation program, which is an option that can help defaulted borrowers who agree to make a certain number of on-time payments. Borrowers were specifically misled regarding how such a program could benefit their credit rating and also about the waiving of certain collection fees. Along with terminating the contracts, the Department announced that it would be issuing enhanced guidance for the remaining collection agencies, increasing training, and expanding monitoring for these types of issues.

Navient, whose subsidiary Pioneer Credit Recovery was one of the groups terminated, has a record of misleading student loan borrowers. In 2006, the Department of Justice and the FDIC found that Sallie Mae/Navient was overcharging 60,000 active-duty servicemembers on their student loans, and handling their payments in a manner that maximized late fees. And In November of last year the CFPB issued a Civil Investigative Demand to Pioneer Credit Recovery, as part of an investigation regarding the company’s work collecting defaulted student loan debt.

Much more change is needed in this area: student loan debt collectors that make a practice of misleading or hurting consumers should be held accountable, and companies that work to collect loan debts on behalf of the federal government should be required to respect borrowers’ rights and to provide them with accurate information.

— Rebecca Thiess

For-Profit College Rule Has Important Weaknesses (and strengths)

Last week the Department of Education released a final rule on gainful employment, a rule that will impose some new limits on career education programs that have poor outcomes for their graduates. The final rule provides some new protections for students in the for–profit education system, but it is also significantly weaker than the draft proposal released by the Administration earlier this year, and still leaves taxpayer dollars flowing to programs that trap students in abusive debt without providing substantial educational outcomes.

For-profit colleges, such as ITT-Tech and Corinthian, are coming under growing federal and public scrutiny for their abusive lending practices and deceptive marketing techniques. In September, the CFPB sued Corinthian Colleges for luring students into taking out private loans to cover expensive tuition by providing them with false and inflated job placement rates, and also for using illegal debt collection practices to collect on those loans.  Corinthian is currently in the process of being shut down by the Department of Education, as it runs 25 of the 114 programs with more defaulters than graduates.

Because Corinthian and programs like it depend almost entirely on federal student aid dollars, it is important that the Department of Education ensure at the front end that these dollars are not wasted and do not cause harm. In May, Americans for Financial Reform joined 50 other groups in urging the Administration to strengthen its proposed draft gainful employment regulation, but unfortunately the rule moved in the opposite direction. The new rule fails to provide financial relief for students who enroll in programs that lose eligibility, and lets poorly performing programs continue to enroll students up until they lose eligibility.  See comments on the rule from AFR members and allies including TICASSEIU, a coalition of Civil and Human Rights groups, CRL and more.

Despite these weaknesses in the new rule, it does provide some new protections for students. In recent years, some for-profit colleges have offered programs that they have said would prepare students for a specific occupation, yet after taking out loans and completing the program, students have found they were unqualified to legally practice that occupation in their state. The new rule protects against programs that do not qualify students to get the certification necessary to practice their intended occupation. However it fails to protect online students, who may still find themselves, upon graduating, not legally qualified to get the licenses they would need to practice in the state in which they live.

The rule also fails to take into account the outcomes of students who withdraw from programs— unfortunately a very large proportion in some schools. The final rule dropped a provision that would have considered the default rates of all program attendees—whether or not they graduated—instead of just the default rates of those who graduated from the program. Instead, the rule considers a student’s debt burden relative to their income after having graduated from the program. Though the Department kept the debt-to-earnings metric strong, not including those who enrolled but didn’t graduate from programs weakens the rule, as many for-profit college students are unable to complete their degrees yet still have debt from having tried.

The new regulations are a modest step forward. As advocates on these issues have made clear though, much more work in this sphere remains to be done to prevent abusive and predatory practices. The Department of Education needs to do more to protect Corinthian students as the school shuts down, and to take on problems facing students in other poorly performing schools and programs.

— Rebecca Thiess

Consumer Agency Files Lawsuit Against ITT for Predatory Lending Practices

The Consumer Financial Protection Bureau has taken its first public enforcement action against a company in the for-profit college industry, filing a lawsuit against ITT Educational Services, Inc. The company, based in Indiana, is a for-profit provider of post-secondary technical education, with tens of thousands of students enrolled online or in the school’s 150 institutions. The agency is accusing the for-profit college chain of engaging in predatory student lending by pushing students into high-cost private student loans that, in Director Rich Cordray words, “were destined to default.” In fact, the company itself projected a default rate of 64 percent, predicting that well over half of students who borrowed would be unable to repay. The CFPB is seeking refunds for victims, a civil penalty, and an injunction against the company, among other forms of relief.

The CFPB asserts that ITT coerced students into taking on high-cost loans with interest rates of more than 16 percent. These loans additionally had opaque terms, with some students not even aware they had a private student loan until they received a collection call. The CFPB alleges that the company knew students would have no way to pay the temporary loans they were encouraged to take out to fund tuition gaps (the amount of tuition owed after federal financial aid resources were exhausted). ITT’s programs cost significantly more than similar programs at public colleges, and because the tuition is higher than the maximum federal student aid limit, many students had to fill that gap with outside financing. To fill this hole ITT offered students no-interest loans that looked appealing, but were due in full at the end of a student’s first academic year. When the end of the year came and students couldn’t repay, the company pushed them into new high-cost private student loans to repay both their temporary loans and their second year of tuition. ITT’s CEO even told investors that the plan all along was for students to end up converting the temporary loans to long-term loans.  In addition to misleading students on loans, the company also misled them on future job prospects, leading students to believe they would earn enough money upon graduation to repay their loans even though past experience showed otherwise.

Four state attorneys general, from Illinois, Iowa, Kentucky, and New Mexico, joined the CFPB in announcing legal actions. New Mexico Attorney General Gary King—who filed a separate suit in New Mexico—explained: “A significant percentage of the New Mexico students that entered the ITT nursing program were unable to complete the program; cannot get a job in their chosen field; because their ITT credits will not transfer, they must start over at another institution; and, these students continue to suffer under their heavy student loan debt.” Kentucky Attorney General Jack Conway, who is heading a group of 32 attorneys general investigating for-profit colleges, added that “some of these schools are more interested in getting their hands on federal and state dollars than educating students.”

The CFPB is using its authority under the Dodd-Frank Act to take action against institutions engaging in “unfair, deceptive, or abusive practices” in this case. Relatedly, the CFPB also recently finalized a rule, which takes effect on March 1, allowing the agency to supervise certain nonbank servicers of private and federal student loans.

— Rebecca Thiess