Mike's Take: The Challenge for Student Loan Collections: Thoughts from NCHELP

Paul Legrady was at the National Council of Higher Education Loan Programs (NCHELP ) Debt Management Conference last week at Walt Disney World, and I asked him to relate his thoughts from the conference:

    “As the credit crunch expands throughout the U.S. economy in the second quarter of 2008, no company that extends credit to consumers seems to be going unscathed. Some recent examples include Washington Mutual’s recapitalization in response to bad bets on loans to consumers, Health Management Associates’ disclosure that bad debt accounted for a whopping 24% of revenues, and the downgrading of GMAC’s bond ratings. And, that’s not even mentioning residential mortgages. And, we’re not even officially in a recession, at least not yet. For many credit issuers, it should get worse before it gets better.

    “It was against this backdrop that roughly 300 experts in the field of student loan collections gathered in Walt Disney World last week. The NCHELP Debt Management Conference attracted leaders of the country’s guaranty agencies – organizations created by law to extend student loans and keep these loans from going into default – as well as the collection agencies that help them execute this increasingly challenging mission. The saccharin-sweet Disney staff constantly saying, “Have a Magical Day!” could not mask market conditions.  

    “At the conference, guaranty agency (GA) officials described troubling statistics affecting the market for student loans. For example, guaranty agencies track “re-delinquency” rates, which describe the percentage of their student loans that go into delinquency, come back out through default prevention techniques, and then go back into delinquency. One official described how this figure had increased recently from 50 to 65 percent. With NCHELP officials suggesting more change afoot on the legislative front with the upcoming reauthorization of the Higher Education Act, GAs are challenged on a number of fronts.

    “Private student loans, once thought to be the free-market solution to a shortfall of federal education funding, are also taking a beating as the market for securitization of these loans has dried up. For example, shares of First Marblehead, a student loan provider, have dropped about 80% in the past 6 months as its insurance provider went into bankruptcy. One panelist forecaste “giant waves of reform” starting in Congress, reshaping the private student loan market in coming years.

    "Like credit grantors in other industries, GAs have different strategies to avert default and collect on defaulted loans. Interestingly, Maine had the best performance on collections in the fourth quarter of 2007, and New Jersey ranked worst. What makes the difference? In part, at least, it’s due to collection agencies.

    “While some GAs such as the state of Kentucky operate their own call centers quite successfully, and place no accounts with collection agencies, most of the successful GAs do use agencies. As any agency owner or executive would tell any prospective client, collection agencies that specialize in the recovery of delinquent debt tend to do better in this field than their clients. Don Taylor of Account Control Technology, an industry veteran, told a room full of GAs, “you have a lot to learn from your agencies.”

    “For the most part, he is right. A good collection agency will not solve every credit-related problem faced by credit issuing companies. But, as the consumer credit crisis worsens, the credit issuers that can extract the most value from their networks of service providers will be the ones most capable of promoting shareholder value. This is true for collections in all market segments – not just student loans.”