You may be able to get your student loan collection fees waived through student loan rehab, a lump sum settlement, or loan cancellation.
How do you owe tens of thousands of dollars more in student loan debt than what you borrowed? Collection fees are a big reason why your loan balance to the Department of Education may have ballooned — although interest rates and late fees also contribute to this.
In this post, I’ll explain:
- When collection fees can be added to federal student loans
- Amount of student loan collection fees that can be added to your loan balance
- How to get student loan collection fees waived
Disclaimer: Although I am a student loan lawyer, this article contains general information and should not be taken as legal advice. If you want legal advice that pertains to your specific situation, you should schedule a free 10-minute consultation with me.
How common are student loan collection fees?
Student loan collection fees are more common than you think. Many student loans have collection fees added when the loan goes into default, and many American borrowers are in default.
In 2018, the federal government collected $2.9 billion from defaulted student loan borrowers. In 2019, federal student loan debt collections surpassed $3 billion.
In 2020-2021, former President Trump and Congress passed the CARES Act, which President Biden has since extended. This act suspended payments on federal student loan debt during the coronavirus pandemic.
However, under normal circumstances, you can bet that the number of defaulted borrowers would have increased even more.
This graph begs the question: How is the government getting this money if the debt is in default?
The federal government can collect on defaulted student loans through the following programs:
- Wage garnishment
- Income tax refund offset
- Social Security benefit offset
- Debt collection fees paid off through loan rehabilitations and lump-sum settlements
Of course, these debt collection activities occur only if your loans are in default status. But since 1 out of every 10 Americans has a student loan in default, that’s still a lot of potential funds that the government can siphon from your hard-earned money.
What is the average student loan debt? The average federal student loan debt is about $36,000 per borrower. The average private student loan debt is about $54,000 per borrower. Americans owe over $1.5 trillion dollars in student loan debt.
How collection fees are added
Collection fees can be added to your loan balance once you default.
On top of its substantial 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. It could be 90 days, 180 days, or even one day past due — it’s different for each private loan provider.
In addition to defining default differently, each loan 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. Their contact information should be easily google-able.
Do you have to repay student loans in collections? Yes, you are still legally required to repay student loans that have gone into collections. However, you may get them to settle for 60% of your loan balance if you have a lump sum lying around.
Reasonable collection fees: what can you expect?
The federal government can charge a reasonable collection fee to your balance. In theory, the collection fees cover the cost of collection.
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. However, 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 of Education can charge only 18.5% in collection fees.
For loan rehabilitation, you’ll be charged collection fees depending on what type of loan you have.
The DOE 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 balance, interest, and late charges.
How to get student loan collection fees waived
How can I get rid of my student loan collection fees? You can get rid of student loan collection fees through student loan rehabilitation, settlement, or cancellation. The easiest way to waive 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 more challenging, so you’ll want to act fast.
Federal student loan rehabilitation
You basically have one legitimate option to waive collection fees: student loan rehabilitation.
Student loan rehabilitation is when you promise to make full federal student loan payments for 9-10 months so that you can pull your loan out of default and back into good standing.
For loans the federal government 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 voluntary payments as collection fees. This is why it makes sense to seek the lowest payment amount possible during rehabilitation.
Federal Family Education Loans (FFEL) held by a guaranty agency may or may not waive collection fees after you complete the loan rehabilitation program.
You’ll want to review your loan rehabilitation agreement letter that you get from the debt collector for the terms on your defaulted FFEL program loan.
Federal student loan settlement
There is one other option to get collection fees waived: federal student loan settlement.
Qualifying for a student loan settlement includes defaulting on your federal student loans, tanking your credit report, then taking it to court. It’s a long, difficult process.
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 30-90 days. Not many people have access to tens of thousands of dollars to settle a defaulted loan.
That’s why student loan rehabiliation is a better way to waive collection fees.
Private student loan collection fees
Private loan collection fees are different from federal loan collection fees, mainly because every private student loan lender has its own unique rules.
The primary differences between federal and private student loan collections include:
- Statute of limitations. What is the statute of limitations for student loan collection? There is no statute of limitations for federal loans, but it is 6 years for private loans.
- Rehabilitation. This is not an option for private loans, only federal ones.
- Settlement. Settlement is still an option, often for less than you’d expect with a federal loan. You can typically settle a private student loan for a lower percentage than a federal settlement — 60%-80% compared to at least 90%.
Private lenders and their terms vary much more drastically, so there's no “one-size-fits-all” answer for these collection fees. Check with your loan provider, loan servicer, or private collection agency.
Loan cancellation to waive collection fees
Another option for qualifying student loan borrowers is to apply for loan cancellation due to:
- Borrower Defense to Repayment program
- Total and Permanent Disability loan forgiveness
- False certification discharge
- Unpaid refund discharge
- Closed school discharge
- Undue hardship discharge
You can claim Borrower Defense to Repayment if your school misled you or violated certain state laws.
Eligibility for these loan cancellation programs varies, but you may be able to gather what the rest of them mean from their names.
I thought I’d mention that Direct loan forgiveness programs like Public Service Loan Forgiveness won’t apply if you have collection fees because you can’t be in default and qualify for PSLF.
Ready to deal with collections? I’m on your team.
I’m a student loan lawyer with years of experience helping people like you with everything student loan-related.
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If you’re ready to talk, you should schedule a free 10-minute call with yours truly. I’ve dealt with every situation you can think of, so we can create a clear game plan to deal with your collection fees.