Trying to figure out how you owe tens of thousands of dollars more in student loan debt than what you borrowed?
Two words: collection fees.
These two words, more often than not, are the reason why the balance you owe to the Department of Education has doubled.
In this post, I’ll review:
- When collection fees can be added to federal student loans
- The amount of student loan collection fees that can be added to your loan balance
- How to get student loan collection fees waived
Before that, let’s make sure you know you’re not alone
The Department of Education has Collected $3.3B For Defaulted Student Loans
In 2018, the federal government collected $2.9 billion from delinquent student loan borrowers.
This fiscal year, which started last October 1, has been even better. From October through March, federal student loan debt collections totaled $3.3 billion.
How are they getting this money?
Wage garnishment. Social Security Benefit Offset. Tax Refund Offset. And debt collection fees paid off through loan rehabilitations and lump-sum settlements.
- How to Get Your Tax Refund Back After It’s Been Offset
- How to Stop Student Loan Garnishments with Loan Rehabilitation
Of course, these debt collection activities occur only if you’re loans are in default status.
Collection Fees Can Be Added to Your Loan Balance Once You Default
On top of its powerful collection powers, the Department of Education also has the power to add massive collection fees to your loan balance once you're in student loan default.
As a reminder, you default on a federal student loan when you go more than 270 days without making a required monthly payment under a repayment plan.
With private student loans, there’s no one answer when collection fees can be added to your balance.
Each private loan program is different.
Some define place your loans into a default status after you miss one required student loan payment.
Others wait several months.
In addition to defining default differently, each program has different repayment terms that determine when collection fees can be added to your loan balance.
Your best bet to find out what collection fees can be added to your private loan is to look at your promissory note. If you don’t have it, request it from the loan servicer, lender, or debt collection agency.
Reasonable student loan collection fees can be added to your loan balance
In general, the federal government can charge a reasonable collection fee to your balance.
So what exactly is a reasonable collection fee?
That’s a little unclear.
Here’s what I mean.
The U.S. Department of Education has previously said that it would charge no more than 25% collection fees on all student loans.
But that percentage changes depending on how you choose to get your loans out of default.
If you choose to consolidate your student loan out of default, the Department can charge 18.5% in collection fees.
For loan rehabilitation, the percentage of collection fees you’ll be charged depends on what type of loan you have.
The Department says it doesn’t add collection fees to the new loan balance after you complete loan rehabilitation.
Lastly, for Perkins Loans, you can be charged up to 30% of principal, interest, and late charges.
How to Get Student Loan Collection Fees Waived
The easiest way to avoid collection fees is to set up a loan repayment plan within the first 60 days after you default.
After the initial 60-day period, getting student loan collection fees waived becomes harder to do.
You basically have one legitimate option:
Student loan rehabilitation.
For loans the Department of Education owns, you won’t be charged any collection fees after you complete the loan rehabilitation program.
The government will, however, take 20% of your 9 monthly rehabilitation payments as collection fees. This is why it typically makes sense to get the lowest possible payment amount.
FFEL loans held by a guaranty agency (again ECMC, MOHELA, etc.) may or may not waive collection fees after you complete the loan rehabilitation program. You’ll want to review your loan rehabilitation agreement letter you get from the debt collector for the terms.
There is one other option to get collection fees waived:
A federal student loan settlement.
Most borrowers, however, won’t be able to get their collection costs waived as part of a settlement because they simply can’t afford the settlement.
Federal student loan settlements are costly.
Typically, you have to pay at least 90% of the loan amount (current principal and interest) within 30 to 90 days.
Not many people have access to tens of thousands of dollars to settle a defaulted loan.
Borrower Defense to Repayment
Another option for a select number of student loan borrowers is to apply for loan cancellation under the Borrower Defense to Repayment program, Total and Permanent Disability loan forgiveness, or through false-certification, unpaid-refund, closed-school discharge, or an undue hardship discharge.