Obama administration explores government collection of student loan payments

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The Obama administration is launching a new pilot program that could shift the collection of student loan payments away from private companies and into the hands of the government.

The Treasury Department wants to change the current process and a pilot program to research this possibility will likely begin early next year, The Huffington Post reported.

Under the pilot program,  Treasury Department will collect some student loan payments directly instead of them being passed through outside contractors. People familiar with the project told HuffPo that they hope eventually bringing these collections in-house will lower the number of defaults on these loans and give assistance to troubled borrowers with delinquent debts.

Education Secretary Arne Duncan has the authority to bring all student loan collections in-house, but Congress would have to approve the funding for such a move.

The Treasury Department has been looking to take on a bigger role with federal student loans since at least 2012, according to a Government Accountability Office report, especially as default rates continue to rise and reports of “inadequate service” by the contractors have continued to come out.

“We must do everything in our power right now to guarantee accuracy and fairness in the loan servicing industry,” Deputy Treasury Secretary Sarah Bloom Raskin said in September.

At issue are the billions of dollars the private debt collectors have made over the past few years, despite continued reports and complaints that they mislead borrowers and illegally inflate minimum payments.

The Education Department’s debt collectors received $1.6 billion in commissions and bonuses from 2010 to 2013, according to the department’s inspector general. They estimate that these collectors will receive an additional $5 billion between this year and 2016. As the cost of college and the number of loans given out continues to rise, so does their profit margin.

But despite the obvious problems with these collection agencies, there are certainly concerns with giving the government even more power over student loans.

The Education Department is already expected to rake in $127 billion in profit over the next decade from lending to college students and their families and bringing in the collections process could provide an even bigger financial incentive to keep college graduates mired in debt.

The Education Department has been documenting the violations committed by the private companies, but has done nothing about it, a GAO report found. This kind of oversight does not speak highly as to how they would handle similar misconduct in-house.

Even more troubling is that the model for the Education Department’s possible switch is the Internal Revenue Service. The IRS switched to in-house collections in 2009, but can hardly be held up as a perfect example. The agency has been mired in scandal over targeting of conservative groups and a disregard for the law.

Change is likely needed to this collection process, but a big government solution is rarely the correct answer.