The Shadow System Behind the Default Cliff

This blog is part two of a three-part series that examines the shadow network of vendors that control the federal student loan market and the role they play in driving student loan defaults.

Introduction

In Part 1 of this series, we laid out the scale of the student loan default cliff: as many as 13 million federal student loan borrowers are expected to be in default by the end of 2026, which is roughly 1 in 4 people who owe money on a federal student loan. These borrowers have spent years navigating servicer transfers they were never told about, Income-Driven Repayment (IDR) applications that disappeared into processing queues, billing statements showing the wrong amounts, and customer service "doom loops" that ended in disconnections. The default cliff is the result of a broken student loan infrastructure crumbling upon failed policy decisions and insulated against accountability for those who profit from borrower distress.

The U.S. Department of Education (ED) does not actually manage the federal student loan system. ED owns roughly $1.6 trillion in loans on paper, but the day-to-day work of communicating with borrowers, processing payments, evaluating applications for relief, and collecting on defaults is contracted out to a sprawling constellation of private vendors—servicers, default contractors, private collection agencies, and, increasingly, the Treasury Department and its own vendor stack. But amid the dozens of vendors, hundreds of contracts, and thousands of task orders, there remains a notable gap between what the Higher Education Act (HEA) promises and the repayment reality borrowers experience.

That gap is what borrowers feel first. Part 2 of this series maps the system they are trying to navigate, and traces how decades of procurement choices, contract terminations, failed recompetes, and emergency workarounds produced the default apparatus we have today.

Background

The Default Paradox: Uniquely Protected, Uniquely Punished

Federal student loans occupy a contradictory place in American consumer credit. On the one hand, borrowers in default have access to statutory pathways back to good standing that exist in no other corner of the credit market. On the other hand, the federal government wields collection tools against defaulted borrowers that no private creditor can legally use. Both halves of that paradox are administered not by ED directly, but by the same constellation of private contractors described above. Whether the protection actually reaches a borrower, and whether the punishment actually stops when the law says it should, depend almost entirely on whether the relevant vendor decides to do its job correctly.

Two of those protections are structural and define what “curing” a default actually means under federal law. The first is loan rehabilitation: a borrower who makes nine voluntary, on-time, “reasonable and affordable” monthly payments over 10 consecutive months has the default removed from his credit history and the loan restored to good standing—a remedy unavailable to any borrower of private debt. The second is consolidation, which allows a defaulted borrower to roll his loans into a new Direct Consolidation Loan and immediately regain access to Income-Driven Repayment, deferment, forbearance, and Public Service Loan Forgiveness. Both rights are codified in the HEA, and both are, on paper, simple. A borrower with steady access to a working phone number and a competent contractor on the other end of it should be able to exit default within months. In practice, however, both routes are routinely obstructed by the contractors who are paid to administer them.

The harms of default, by contrast, arrive largely on autopilot. Where rehabilitation and consolidation require a borrower to find the right contractor, submit the right paperwork, and have it processed correctly, the federal government’s collection tools require no such cooperation or checks for accuracy—and, critically, no court. Through administrative wage garnishment, ED’s contractors can seize up to 15 percent of a defaulted borrower’s income by sending a notice to their employer, bypassing the judgment process that any private creditor would have to obtain in court. Through the Treasury Offset Program, the government can intercept federal payments owed to the borrower—including federal tax refunds and the Earned Income Tax Credit, a benefit specifically designed to lift low-income working families out of poverty. The same program can reduce Social Security retirement and disability checks below the federal poverty line, a practice the Consumer Financial Protection Bureau (CFPB) has documented affecting hundreds of thousands of older borrowers. And unlike nearly every other consumer debt in the United States, federal student loans carry no statute of limitations—a debt incurred at age 22 can be collected against at age 72, and routinely is.

And when those automated tools are not enough, the government retains one more option: it can take the borrower to court. ED may refer a defaulted borrower’s case to the U.S. Department of Justice (DOJ) for civil litigation. The case goes not to a courthouse directly but to DOJ’s Nationwide Central Intake Facility in Washington, which assigns it out either to a U.S. Attorney’s office or, more likely, to a private law firm working under DOJ’s Private Counsel Program. That program pays those firms on a contingency basis—and federal student loans are the overwhelming majority of what it handles.

Once a judgment is entered, the consequences compound: the borrower can be assessed court costs and attorney’s fees on top of the balance, and the government gains tools that exceed even its formidable administrative ones—a judgment lien that can attach to the borrower’s home, levies on bank accounts, and court-ordered wage garnishment unconstrained by the 15 percent cap that limits its administrative counterpart. Moreover, once these loans are assigned to DOJ, borrowers lose their right to cure the default through consolidation or rehabilitation.

A borrower who could not get a returned phone call from the contractor managing her default process may nonetheless find that same debt escalated into a federal lawsuit, prosecuted by a private attorney paid a percentage of whatever can be wrung out of her. As data from the National Consumer Law Center shows, these cases overwhelmingly result in default judgments against borrowers.

The asymmetry is palpable: when the protections fail, they fail quietly, but when the harms arrive, they land in paychecks, tax refunds, and Social Security checks before the borrower has any meaningful opportunity to object.

Building on a Broken System: The History of Student Loan Default Contractors

The entire federal student loan collections infrastructure was built on a broken system—literally. The Default Management Collections System (DMCS), which is the central servicing platform for defaulted accounts, has been fraught with errors since its creation. In 2010, ED contracted with Affiliated Computer Systems (ACS) to build a second-generation default servicing platform because the initial platform, which was designed when Federal Family Education Loan (FFEL) Program loans dominated the market, could not handle the anticipated volume or program requirements in a 100 percent Direct lending environment. The build was rife with delays, lack of technical requirements, and operational errors. One investigation by the Inspector General in 2015 found that “FSA could not ensure that [ACS] delivered a fully functional DMCS2 because FSA did not develop an adequate plan, ensure [ACS] met milestones, or use appropriate systems development tools.”

In 2013, ED contracted with Maximus for $13 million to fix the DMCS platform. By 2014, all default work, including Default Resolution Group (DRG) operations, had been transitioned to Maximus, with a contract value of nearly $850 million. Despite a contract value increase of more than 6,000 percent, problems persisted. Interviews with former federal officials interviewed for this blog revealed that the DMCS continues to have “material deficiencies,” including, for example, accounts populated with dummy Social Security numbers, inaccurate loan balances, or missing communication records.

But the problems in the student loan default system are not limited to DMCS. The other contractors administering the default system have been under sustained scrutiny throughout the past decade. The CFPB catalogued a steady stream of complaints about private collection agencies (PCAs) failing to process rehabilitation paperwork, sending defaulted borrowers misleading information about their options, and steering them away from consolidation toward more expensive alternatives. Litigation reached the same conclusions through different doors. In Bible v. United Student Aid Funds, the Seventh Circuit allowed a class action to proceed challenging the imposition of collection costs on a borrower who had timely entered rehabilitation. Years later, the CFPB’s enforcement action against Performant Recovery confirmed that what borrowers had been describing for years was not bureaucratic inertia but a deliberate revenue strategy.

By 2022, the case for some kind of structural reset was unmistakable, and the Biden Administration responded with three key interventions: first, it fired all of the private collection agencies; second, it launched a recompete intended to completely reimagine the student loan collections infrastructure; and third, and perhaps most critically, it rolled out the Fresh Start initiative. Fresh Start offered nearly all defaulted borrowers a one-time default off-ramp that restored Title IV aid eligibility, removed the default flag from credit reports, and offered access to Income-Driven Repayment, deferment, forbearance, and forgiveness programs without first completing rehabilitation or consolidation. It was the largest acknowledgment in the program’s history that the pre-pandemic default apparatus had produced harm at a scale individual remedies could not address. But as Part 1 documented, fewer than 1 million of the roughly 7.5 million eligible borrowers actually completed enrollment—a shortfall driven in significant part by the same contractor failures the initiative was supposed to remedy.

When Following the Law Becomes a Dealbreaker

On November 8, 2021, when ED took the first structural step the redesign required, cancelling its contracts with the PCAs and recalled all defaulted borrower accounts, routing them back to DMCS for handling by DRG, with the eventual intention of having its newly contracted Business Process Operations (BPO) vendors take over account management. The policy logic was sound: end the perverse commission structure documented in cases like Performant Recovery, bring default management closer to federal oversight, and align it with the broader Unified Servicing and Data Solution (USDS) architecture. Fresh Start was the borrower-facing complement to this back-end reform.

But the BPO transition never produced a stable, fully operational default-servicing structure. The original BPO awards were delayed by GAO protests and onboarding stretched across years. The vendors that did win contracts—EdFinancial, F.H. Cann, Maximus, MOHELA, and originally Trellis—were a familiar (and infamous) set of players drawn from the existing servicing ecosystem, raising the same accountability questions that Members of Congress flagged in a July 2024 letter to Secretary Cardona about the lack of transparency in the USDS transition.

In 2022, the Biden Administration began efforts to execute a new-and-improved collections contract called DMCS-Next. However, despite touting a significant policy reforms in the collections space, by ED’s own account, the new solicitation was essentially the existing DMCS requirements “plus a requirement for the operational system and awardee to fully comply with Third Party Debt Collection regulations…”

Only one vendor submitted a proposal: Maximus. And it was bidding at the very moment it was defending a class action, Bodor v. Maximus, in which it stipulated that it was a debt collector for the purposes of that case and a judge had already ruled that it could be subject to federal debt collection laws, rejecting the company’s claim that, as a government contractor, it was immune from liability.

Those two facts—a contract that now demanded full third-party debt-collection compliance, and a ruling that had just established Maximus could be subject to that law—were irreconcilable. Following the decision in Bodor, Maximus reconsidered its willingness and ability to comply and sought indemnification assurances from ED: in effect, a promise that ED, not Maximus, would absorb the legal exposure of collecting under the Fair Debt Collection Practices Act. When ED declined, Maximus backed out. As ED itself conceded, “despite best efforts, there is no agreement on the DMCS-Next requirements.”

What was meant to be step one of a rebuilt, accountable system instead resulted in no system at all—leaving ED without a durable collection contract, the vacuum it would later paper over with emergency bridge awards and, ultimately, by handing the whole portfolio to the Treasury.

The Trump Administration Seizes on the Chaos

In 2025, the Trump Administration publicly committed to turning the collection machinery back on. On April 21, 2025, ED announced that “involuntary collection” would resume through the Treasury Offset Program. But the apparatus required to execute that announcement at scale was not there. The PCAs were no longer under contract. The staff that oversaw the DRG contract had been hollowed out by the March 2025 reduction in force. And as GAO would soon document, staffing reductions had already degraded ED’s basic ability to assess whether servicers were meeting performance standards.

Unable to rebuild its own default apparatus, ED chose to give it away. In March 2026, ED announced the “Federal Student Assistance Partnership”—a 17-page interagency agreement transferring operational responsibility for roughly $180 billion in defaulted debt to Treasury, with subsequent phases expected to move the entire $1.7 trillion portfolio. ED’s own justification was that the Biden-era termination of PCA contracts had left it with “little vendor infrastructure” to collect from the 9 million-plus borrowers in default. However, the problem was not that ED ended the broken PCA model, but that it never finished building what was supposed to replace it, and that the Trump Administration’s response to an unfinished reform has been to dismantle the agency rather than complete the work.

Backward into the Wreckage

The March 2026 ED-Treasury agreement moved operational responsibility for default collection onto Treasury’s Bureau of the Fiscal Service, which collects delinquent federal debt under its own statutory authorities rather than under the HEA. While the Treasury Department will be expected to uphold the rights borrowers are guaranteed under the HEA, its collections infrastructure simply is not built around those protections the same way ED’s collection infrastructure at least purported to do. In reality, receipts show that ED has yet to find a way to successfully outsource collections in compliance with federal law, and instead has opted to pass the buck to another agency.

According to public data, outbound collection activity—the calls, letters, and garnishment paperwork that initiate involuntary recovery—purportedly runs through one of five private collection agencies on contract with Treasury: CBE Group, Coast Professional, ConServe, Pioneer Credit Recovery, and Transworld Systems. But when a borrower calls FSA about that same account—to dispute a balance, request a rehabilitation, or document a hardship—she is routed instead to one of the Business Process Operations vendors: F.H. Cann, EdFinancial, Maximus, or MOHELA.

That divide is the very crack borrowers too often fall through when trying to repay their loans. Someone being collected against by a Treasury vendor while serviced by a BPO vendor has no obvious place to turn when something goes wrong and no contractor with both the information and the authority to fix it. The result is the same doom loop Part 1 described, now reproduced at the level of procurement: the entity that can answer the borrower’s question cannot act on it, and the entity acting on the account cannot answer the question. Collections was already a convoluted web of vendors competing on commission. The Treasury interagency agreement does not untangle that web; instead, it is reverting to a model so broken that even the first Trump Administration concluded it had to go.

Meanwhile, the Treasury Department is starting to face the same vendor challenges. After initially executing emergency bridge contracts for its own PCAs to take on student loan collections, the government is pulling back those contracts, citing a “procurement error” and rescinding a series of task orders instructing collection efforts.

As a result, we don’t yet know the full web of vendors handling borrowers’ loans, further increasing opacity and reducing accountability in this fractured market.

Conclusion

Over the past several years, nearly every external check on student loan contractors has been weakened. The CFPB’s supervision of student loan servicers, once the leading federal oversight in the space, has been functionally paused. The FSA Ombudsman’s capacity to intake and resolve borrower complaints has been gutted. ED’s own Inspector General’s reach has narrowed, and FSA’s staff has been cut by almost half. The operational consequence is palpable: in February 2025, FSA stopped assessing servicers on accuracy and call quality, citing a lack of staff capacity. Even before it stopped looking, four of the five servicers were failing its accuracy standards. When GAO recommended that ED resume the assessments, the agency declined.

What remains are the slow, case-by-case instruments: state attorneys general, private litigation, Freedom of Information Act (FOIA) requests, and investigative journalism. None of them scales to a 45-million-borrower portfolio, but litigation, at least, has begun doing the work supervision used to. Through Bodor v. Maximus, a consumer protection statute accomplished what contract oversight was supposed to—a pattern we return to in Part 3. And with an increasingly disjointed collections infrastructure, similar cases are likely to follow.

These cases, and the larger story of repeated, failed efforts to reform the collections system, prove that when one vendor holds millions of accounts and sits on the platform of record for every defaulted loan, ED cannot credibly threaten the contract penalties that are its only real enforcement lever—pulling the contract would mean detonating the system it runs. At the same time, the very system that is too consolidated to discipline, is also too disjointed to implement meaningful accountability. A single defaulted loan can move among the platform of record, an outbound collector on a Treasury contract, a BPO call center, and, eventually, a private law firm, none of which answers to the others and not one of which owns the borrower’s outcome. Yet when something goes wrong, the borrower is the only one left footing the bill.

The student loan default cliff is at the same time a system that failed, and a system that is working as designed. The contractors who actually manage borrowers’ loans are not accountable to borrowers; they answer to contracts and commission structures that reward volume, not outcomes. The single entity that should be accountable to the public—the Department of Education—does not manage borrowers’ loans directly and has spent the past year shrinking its capacity and shirking its responsibility to watch the entities that do. And the connective tissues that join the two—the contracts, the interagency agreements, the procurement bridges—are invisible to the public. As a result, everyone involved states that the failure happened somewhere else as 13 million borrowers cascade off the cliff.

Part Three will discuss the successes of various policy, legal, and operational interventions in the student loan default market.

Bonnie Latreille is a visiting Senior Fellow with the Debt Collection Lab at Princeton University. She was the former Student Loan Ombudsman for the U.S. Department of Education and has spent more than a decade helping borrowers navigate the pitfalls of the student loan system.

Persis Yu is the Deputy Executive Director and Managing Counsel at Protect Borrowers. Persis is a nationally recognized expert on student loan law and has over a decade of hands-on experience representing borrowers.

Figure by Jeffrey Himpele, VizE Lab for Ethnographic Data Visualization in collaboration with the Debt Collection Lab.