A U.S. Federal Judge paved way for the Education Department to halt usage of private debt collectors and overhaul the existing federal student loan program by consolidating loan servicing and default collection efforts.

Rather than having private collection agencies solely dedicated to recovering past-due student loans, the Education Department will hand over those duties to companies that service the loans. Those companies will be in charge of helping borrowers before they end up defaulting on their loans, a strategy that is part of a broader overhaul of the federal student loan program, dubbed the Next Generation Financial Services Environment, or NextGen. Critics of private collection agencies have long argued that the agencies pursue collection at all costs, with no consideration for providing borrowers with sustainable solutions to managing their debt. By consolidating loan servicing and default collection efforts, companies would be required to compete for the business to "provide a wide array of services or team up with other firms." Private debt collection agencies still maintain that the Education Department "arbitrarily restricted competition and illegally canceled a contract solicitation they were vying to win."

U.S. Court of Federal Claims Judge Thomas C. Wheeler claims the Education Department "provided sufficient justification for consolidating loan servicing and default collection work" and that it was "within its right to cancel the collection contract solicitation in light of its rollout of NextGen." However, he criticized the Department's "messy bid" for new contractors to manage its $1.5 trillion portfolio of student loans. "There is no such thing as a perfect procurement, and the Department of Education's years-long series of student loan servicing and debt collection solicitations typifies the axiom. But a flawed procurement is not necessarily an illegal one," Wheeler stated in his ruling.

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