The Department of Education (ED) is responsible for managing several student loan programs that together make up the Federal Family Education Loans (FFEL) program. The FFEL will soon be replaced over several years by the Federal Direct Student Loan Program (FDSLP), but will continue to require substantial management for many years until all loans are repaid or forgiven. The FDSLP, President Clinton's legislative initiative, will begin in fiscal year 1994 as authorized by the Student Loan Reform Act of 1993.
Under the current FFEL program, borrowers receive loans through 8,000 participating lenders, such as banks, savings and loans, and credit unions. Each of the loans is guaranteed by one of 46 guaranty agencies. When a borrower defaults on a loan, the lender is reimbursed for the defaulted loan by the guaranty agency. The guaranty agency is then reimbursed by ED after attempting to get the loan back into a repayment status. Within ED, the Debt Collection Service, a unit of the Office of Postsecondary Education, is responsible for collecting defaulted FFEL student loans once they have been assigned to the department from the guaranty agency.
The Debt Collection Service attempts to collect on the loan with its in-house collection staff. If unsuccessful, the Debt Collection Service contracts with private collection agencies to pursue the uncollected debt. Although the Higher Education Act (HEA) authorizes ED to fund HEA-related debt collection activities from default collection, thus far default collection revenues have been used solely to pay for contracts with private collection agencies. All other costs, including in-house staffing related to debt collection, are currently funded out of ED's salaries and expenses budget.
One of the largest debt collection-related contracts, for example, supports the maintenance of a database for the FFEL and Perkins Student Loan programs. This contract also provides for billing borrowers, receiving payments, and depositing payments in the Treasury. Other debt collection-related contracts perform such functions as handling debt collection correspondence, preparing ad- hoc documents for litigation, tracking down addresses of defaulters, and supplying credit reports. Obviously, the availability of these services affects the effectiveness of the Debt Collection Service in collecting on its portfolio of almost $5.7 billion in defaulted student loans.(1) Examples of the magnitude of debt collection- related workload appear in Table 1.
Table 1: ******** Debt Collection Service Workload Data Fiscal # of # of Bills & # of Telephone Year Accounts Letters Sent Calls Received ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 1990 1,045,000 8,000,000 900,000 1991 746,000 8,206,000 969,800 1992 1,001,000 11,000,000 1,300,000 1993* 1,400,000 15,400,000 1,820,000 1994* 2,250,000 24,750,000 2,925,000 1995* 2,900,000 31,900,000 3,770,000 *Projected
Source: U.S. Department of Education, Debt Collection Service Fiscal Year 1994/95 Salaries & Expenses Budget Request.
Recent policy initiatives and levels of program activity indicate that debt collection warrants special attention. Consistent in part with enormous increases in borrowing, defaults have grown by well over 100 percent over the last seven years. Regional debt collection staffing has declined by 18 percent.(2) In fiscal year 1992, defaults on student loans cost federal taxpayers $2.5 billion. Although the new Federal Direct Student Loan Program has been designed to reduce the complexity of student loans, collection of student loans will remain a critically important function for ED.
During the transition from the FFEL program to direct loans, the burden of debt collections could actually increase as lenders and guarantors in the current program begin to withdraw. Currently, the department carries about 1.4 million accounts in its defaulted student loan portfolio. This is up from about 1.0 million at the end of fiscal year 1992 and is projected to increase to 2.9 million accounts by fiscal year 1995. Much of this increase is due to liquidation of the Higher Education Assistance Foundation (HEAF), a national guarantor of student loans that faced collapse in 1990 and has been wound down under ED supervision over the last three years. ED must assume all of HEAF's outstanding defaults. Although the more flexible repayment options incorporated into the new FDSLP, including income-contingent loan repayment, will reduce the likelihood of default, ED will remain responsible for collecting on those defaults that occur in the new program. To collect on the projected magnitude of defaulted loans, ED will likely require substantially increased resources.
The department uses several other tools to collect on student loans in addition to in-house and collection agency methods. The most successful of these is the Internal Revenue Service (IRS) tax refund offset, which resulted in collection of $512 million in fiscal year 1992. ED also garnishes the wages of federal employees who have defaulted on student loans and is developing a pilot wage garnishment program for private employers.
A 1990 study showed the department's revenue collection operation to be reasonably effective. Although it had a higher recovery rate than six of nine guaranty agencies studied, there remain both private and public sector methods and organizational structures that should be tested by the department to further improve its debt collection performance.(3) The IRS, for example, which has a strong record in enforcing compliance with the Internal Revenue Code, could be further used in the collection of student loans. It is incumbent on ED to explore these various alternatives. To do otherwise would be shortsighted and a disservice to the taxpayers. This is truly a situation in which ED has to spend money to make money. There is little doubt the average citizen expects the department to maximize its net revenues from debt collection.
Revenues can also be increased through productivity increases. One method of increasing productivity is through the use of gainsharing programs. Gainsharing programs use incentives and employee involvement systems such as incentive payments and cooperative labor- management relationships to improve productivity and achieve more efficient, effective use of resources. Guidance regarding implementation of gainsharing programs within the federal government has been issued by the Office of Personnel Management.(4)
A prototype of gainsharing was implemented in 1987 within the Debt Collection Service and was considered successful. Nicknamed the Midas Program, this gainsharing program was in effect for the last five months of fiscal year 1987 and helped increase revenues by $16 million. Given the business-type environment of the Debt Collection Service, with productivity increases fairly easy to measure, a gainsharing program may be a logical step in efforts to increase revenues.
The Department of Education's Debt Collection Service should develop a management strategy and evaluation plan, to be adopted by the end of fiscal year 1994, which does the following:
--- maximizes collections, consistent with broader student loan administration policies;
--- identifies ways in which the Debt Collection Service can use a larger proportion of the revenue it collects to fund more of the costs of its operations;
--- tests the effectiveness of different revenue-enhancing measures;
--- devises a gainsharing program within the Debt Collection Service;
--- identifies ways in which personnel, contracting, budget, and
logistical policies can be adapted to enhance the effectiveness of the Debt Collection Service; and
--- to ensure that lower-income students are not adversely affected by the increased debt collection activity, ensures that repayments for those least able to repay are based on income, similar to the income contingent provisions of the FDSLP.
Legislation for the administration's direct loan proposal included additional funding for debt collection activity. The Debt Collection Service's most optimistic projections show new defaults rising rapidly. The recommendation calls for ED to devise an effective approach for dealing with the rapidly growing defaulted student loan portfolio. In implementing its debt collection strategy, the department should be able to take advantage of rapidly changing technology (e.g., call routing, caller ID, optical scanning) to generate additional collection revenue.
Increased collection efforts would have a side benefit as well. An increased emphasis on collecting defaulted loans would send a strong message to defaulters and potential defaulters. This message, along with the income-contingent repayment options included in the direct loan program, could have a significant impact on the percentage of loans that end up in default.
The fiscal impact of this recommendations cannot be determined at this time as it depends upon the plan the Department of Education develops.
1. Represents estimated account dollars for loans included in ED's portfolio of defaulted student loans. By 1999, the dollar value of the defaulted student loans held by the department is estimated to reach at least $9.8 billion.
2. See U.S. Department of Education, Debt Collection Service FY 94/95 S&E Budget Request, undated.
3. U.S. Department of Education, Office of Postsecondary Education, Stafford Student Loan Program, Pilot Debt Collection Study (Washington, D.C., November 30, 1990), p. 4.
4. U.S. Office of Personnel Management, "Federal Personnel Manual Letter 451-456," Washington, D.C., April 10, 1989.
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