What Are Collection Costs on Defaulted Student Loans?

• The Education Department resumed involuntary collections in May 2025, restarting garnishments and offsets, but has not yet indicated if collection fees will return.

• Federal loans historically capped fees around 18.5–25%, but the recent pause significantly reduced or waived these costs. Private student loans are different, with fees determined entirely by the loan agreement and state laws—often between 20–25%, plus court or attorney expenses.

• With collection fees paused, borrowers currently in default have an opportunity to return loans to good standing without incurring additional penalties.

As of May 5, 2025, the Education Department resumed involuntary collections on 5 million defaulted student loan borrowers, restarting wage garnishments and tax refund offsets after years of suspended collection activity. That number could double in a few months since many more borrowers are in late-stage delinquency, according to the Department.

But the recent federal government press release offered no clarity on whether collection fees would return alongside these collection measures. Instead, U.S. Secretary of Education Linda McMahon largely criticized the prior administration, accusing it of using American taxpayers as collateral for irresponsible student loan policies.

Regardless of the politics, if these fees return, borrowers could once again face costs that historically have significantly increased the outstanding federal education debt of struggling borrowers, making it even harder to fully repay delinquent loans.

Related: How to Get Student Loans Out of Collections

Collection costs on defaulted student loans are fees charged to borrowers to cover the lender’s expenses incurred while attempting to recover unpaid debt.

• Federal student loans: These fees are set by federal regulations and historically ranged up to 18.5% of the outstanding loan balance when consolidating, or around 20% of each rehabilitation payment. Currently, many federal fees have been significantly reduced or waived altogether. Federal student loans include Direct Loans, Federal Family Education Loans, and Perkins Loans.

• Private student loans: Collection costs depend entirely on the specific loan agreement and state laws. Most private loan agreements authorize the lender to charge “reasonable” collection fees and attorney costs. For example, some lenders, like Sallie Mae, previously charged collection fees as high as 25% of the principal and interest upon default, although such practices have faced legal challenges. The enforceability and reasonableness of these fees vary by state and are subject to applicable state consumer protection laws.

Collection fees might not feel as urgent as losing your tax refund or having wages garnished, but they’re quietly punishing. Each dollar diverted to collection costs is a dollar not reducing your actual debt, dragging out your repayment and keeping you trapped in debt longer.

Before 2021, the Department contracted private collection agencies (PCAs) to recover defaulted student loans. These agencies were compensated based on a percentage of the amount they collected from borrowers. The Department would pass these collection costs onto the borrower, up to the limits allowed by law.

Each payment made by a borrower in default was first applied to collection fees, with any remaining amount applied to interest and then principal. Agencies were not allowed to assess these fees upfront; instead, a percentage of each payment was directed towards these fees only after costs had been incurred.

Here’s how that would work:

If your defaulted loan balance (principal + interest) is $10,000 and the collection fee is 30%:

• Paying exactly $10,000 would result in $3,000 (30%) going towards collection fees, leaving $7,000 to reduce your balance. Your loan would still have a remaining balance of $3,000.

• To completely pay off the $10,000 debt, you’d need to pay approximately $14,285.71. From this amount, $4,285.71 (30%) covers collection fees, and the remaining $10,000 settles the loan.

There are specific limits on the collection fees that can be charged when rehabilitating or consolidating defaulted loans.

Rehabilitation

Borrowers with commercially-held FFEL Program loans may be charged collection fees up to 16% of unpaid principal and accrued interest. For Department-held loans (both FFEL and Direct), collection fees typically amount to approximately 20% of each of the nine rehabilitation payments, without additional fees added afterward.

Consolidation

When consolidating defaulted Direct Loans or FFEL Program loans, lenders may add collection fees up to 18.5% of the principal and interest. But fees can be significantly lower:

• Forced income-driven repayment (IDR) consolidations typically have a flat fee of $150 unless exceeding the 18.5% threshold.

• If borrowers establish three consecutive monthly payments prior to consolidation certification, fees are reduced to 2.8%.

• Outstanding interest and collection fees are effectively capitalized upon consolidation, meaning they become part of the principal balance of the new loan.

The Department waived all collection costs during the Fresh Start initiative and prohibited FFEL guaranty agencies from adding collection costs during the student loan payment pause.

Related: How to Get Student Loans Out of Default Fast

As of September 2024, the Department of Education no longer contracts private collection agencies to handle defaulted federal student loans and has recently waived or significantly reduced collection fees in many cases. During the Fresh Start initiative and the student loan payment pause, the Department did not charge any collection fees for rehabilitation or consolidation.

As of May 2025, it is unclear how collection fees will be structured moving forward, as the Department terminated contracts with private collection agencies in 2021. Previously established guidelines provide an informative baseline, but borrowers should stay alert for updates from the Department on revised policies.

If you’re among the millions of defaulted borrowers, now is an ideal time to take advantage of the Education Department’s current stance on collection fees and get out of default status.

Concerned you can’t afford the monthly payments, especially if you owe a massive amount of student debt? Check your eligibility to enroll in an income-driven repayment plan after getting out of default.

These plans could offer more manageable repayment terms after you get your federal loans back into good standing and placed with a new loan servicer.

Sources:

• Education Department announced it would restart collections on millions of borrowers in default. https://www.ed.gov/about/news/press-release/us-department-of-education-begin-federal-student-loan-collections-other-actions-help-borrowers-get-back-repayment

Related Readings:

• Sallie Mae Collections: How to Respond

• How the Chain of Title Works with Student Loans

• What Does Student Loan Permanently Assigned to Government Mean