WASHINGTON -- Two of the debt collection companies that the U.S. Department of Education earlier this month accused of misleading borrowers could potentially continue to collect defaulted loans on the department’s behalf under a different contract.

Coast Professional and National Recoveries were among the five companies whose contracts the department said it would end, citing “materially inaccurate representations” they made to borrowers who were trying to get their loans out of default.

But while the department won’t give the two companies any more business under their 2009 contracts, newer agreements they have with the department so far appear to be unaffected by the allegations of misleading borrowers.

Coast Professional and National Recoveries were among the 11 entities that were awarded new debt collection contracts last September as part of the department’s effort to redo all of its 2009 agreements with debt collectors.

A department official, who declined to be named, said Wednesday that the agency had not yet decided what action it would take regarding the companies’ 2014 contracts. (The department has not yet purchased debt collection services from any company under those contracts, federal records show.)

Lawsuits, Protest Filed

Meanwhile, the department’s crackdown on federal debt collectors, which was widely praised by consumer advocates and some Senate Democrats, is facing a legal backlash.

Both Coast Professional and National Recoveries -- as well as a third company -- have filed lawsuits against the Department of Education over its decision to end the earlier 2009 contracts.

Coast Professional last week filed a complaint under seal in the U.S. Court of Federal Claims, a redacted copy of which was obtained by Inside Higher Ed. The company accuses the department of acting arbitrarily and not following proper procedures. It asks a judge to order, among other things, that the department stop providing new student accounts to its competitors who had their contracts extended.

National Recoveries and a third debt collector whose contract was also being ended, Enterprise Recovery Systems Inc., are seeking similar relief. Their full complaints were also filed under seal.

A federal judge on Wednesday consolidated all three cases. He has scheduled oral arguments in the case on April 8.

Separately, a fourth debt collection agency, the Navient-owned Pioneer Credit Recovery, last week filed a formal protest of the department’s decision with the Government Accountability Office, which resolves disputes between federal agencies and contractors as an alternative to litigation. The GAO has 100 days to make a recommendation, which is not technically binding, but the office's recommendations are customarily followed by federal agencies.

The swift response by the debt collection companies to the department’s ending of their contracts illustrates the complexities of a federal student loan system that is administered largely by outside third parties.

It also comes as President Obama this week unveiled a Student Aid Borrower Bill of Rights, promising to improve and standardize the customer service experience of federal student loan borrowers.

But even as Obama orders the Education Department to strengthen protections for borrowers, the agency’s efforts can be complicated by the political clout of contractors or a complicated set of federal procurement rules and procedures.

The debt collection contracts are particularly lucrative, bringing in tens of millions of dollars for the companies each year. The companies also employ hundreds of people, which means the local member of Congress where companies are located usually has an interest in the deals.

After Coast Professional officials learned late on a Friday evening last month that the department was ending their contract, court documents show, three executives flew to Atlanta to stake out the department’s field office there at 7:30 a.m. the following Monday.

When the appropriate department employee wasn’t there, they hopped on a plane the same day to Washington and went to the department’s headquarters. They eventually were able to meet with some of the department’s top officials, but were unable to persuade them to change the decision.

New CFPB Findings

Separately, the Consumer Financial Protection Bureau on Wednesday said that its oversight of some student loan debt collectors that work for the Department of Education revealed a number of problems in recent months.

The CFPB found that some of the companies, which it did not name, overstated the benefits of federal programs, misrepresented the requirements of certain benefits for defaulted borrowers and falsely gave the impression that the company intended to take legal action against borrowers (when in, fact, it did not).

The consumer bureau said that the companies with such violations had undertaken corrective actions that regulators are now reviewing.