Student Loans Sold to Collections: How to Get Out

#1 Student loan lawyer

Updated on February 16, 2024

Private student loans are often sold to collection agencies after a borrower misses at least six consecutive monthly payments and defaults.

Not every lender sells their debts. The timeline and process vary by lender, but what typically comes next is that that loan is moved to an internal collections unit that will have a crack at coaxing the borrower into resuming payments. The loans will stay there for a few months. If that group’s calls and threats of wage garnishment and lawsuits don’t work, the loans are often charged off and sold at a discount to another company.

What happens next depends on who now owns the loan, where the borrower lives, how much they can afford to pay, when they last made a payment, and more. Ahead, I’ll show you how to navigate the process and uncover the steps you can take to get your student loans out of collections after they’ve been sold off.

Related: How to Apply for The Fresh Start Program for Student Loans

Can student loans be sold to collection agencies?

Yes, it is possible for private student loans to be sold to collection agencies if the borrower stops making payments for several months in a row. This is because the promissory note that the borrower signed when they took out the loan lets the lender sell it without the borrower’s consent.

The story is different with federal student loans.

The U.S. Department of Education doesn’t sell defaulted student loans to debt collection agencies. The federal government put in place a different mechanism: It moves defaulted loans from loan servicers like MOHELA and Aidvantage to a private company it hired to handle collection activity, Default Resolution Group. Borrowers must work with DRG to dig out of default and return to good standing.

What are the consequences of a student loan being sold to a collection agency?

The consequences can be severe when a student loan is sold to a collection agency. Collection fees are added to the loan balance, and the default status remains on your credit report for up to seven years, further lowering your credit score and pushing loans for cars and homes out of reach.

There’s also the risk of being sued. Debt collectors can take you to court right after they receive your loan but often wait several months or even years before filing paperwork with a judge to get you to pay up.

Related: How to Get Rid of a Student Loan Judgment

Of course, there are more than just financial repercussions – when dealing with student loan debt, there’s also a psychological burden that often takes longer to heal than the actual debts. Stress, anxiety, depression, loneliness, and other mental issues may stay far beyond paying off the loans themselves.

What happens when federal student loans go to collections

When federal student loans go to collections, the Education Department adds collection costs to the balance, and the loan amount is immediately due through a process called acceleration. The interest rate will remain the same as outlined on your promissory note.

You’ll also lose access to repayment options like deferment, forbearance, income-driven repayment plans, and some student loan forgiveness programs.

Not only will you lose access to these federal benefits, but a student loan default status will be added to your credit report. It will stay there along with the late payments for the next several years unless you get out of default with the loan rehabilitation program.

Finally, the federal government can garnish your wages without a court order, take your tax refund, stop you from getting financial aid, and block you from borrowing a home loan from the Federal Housing Authority. Read more about FHA guidelines for defaulted student loans.

You can’t be arrested for not paying student debt — federal or private — but the lender can sue you and your cosigner to recover the loan balance.

Learn more: Private Student Loans in Collections

Can a collection agency sue you for a student loan they bought?

A debt collector can use you for a student loan debt it purchased. When it bought the loan, the collection agency became the loan holder, which means it may take you or your cosigner to court to recover the unpaid money. It also can report the missed payments and default status to the three major credit bureaus.

Related: What Happens If You Default on a Sallie Mae Student Loan?

Can student loans be forgiven if in collections?

Federal student loans in collections can be forgiven if you can’t work due to a disability, went to a fraudulent school such as ITT Tech or DeVry, or qualify for President Biden’s sweeping debt cancellation plan.

Related: How Borrower Defense to Repayment Works

Sadly, if you’re relying on the Public Service Loan Forgiveness or Income-Driven Repayment Plan Forgiveness programs to wipe out your debt, your loans must first be returned to good standing.

Private student loans cannot be forgiven after they’ve been placed in collections. Your only options to get rid of the debt before the statute of limitations runs out are to:

  • Contact the creditor to negotiate a settlement.

  • File student loan bankruptcy.

Related: How to Get Rid of Private Student Loans

How to get student loans out of collections

You can get your federal student loans out of collections using one of the options offered by the Department of Education (settlement, rehabilitation, or consolidation) or, in rare cases, by declaring bankruptcy.

1. Settle the debt with a lump sum

Settlement wipes out some of the outstanding interest and a small part of the principal balance, but you must pay the reduced amount within three months.

Read more about the student loan settlement process.

2. Rehabilitate your loan

Loan rehabilitation returns your loans to good standing after you make nine monthly payments on time in ten months. Rehabilitation can remove collection fees and erase the default status from your credit history, but not the missed payments.

Related: How to Rehabilitate Student Loans

3. Consolidate the defaulted loans

Loan consolidation pays off the loans in default and gives you a new loan made under the Direct Loan Program. You can apply for a Direct Consolidation Loan for free online at

Related: How to Consolidate Defaulted Student Loans

4. Discharge your student loans in bankruptcy

Filing student loan bankruptcy may let you get part or all of your student loans discharged in bankruptcy if you can prove undue hardship.

This option is a last resort and should be pursued after all other efforts have failed. It’s possible to get rid of student loans by filing for bankruptcy, but the bar is very high compared to other loans that may be discharged in bankruptcy.

Bankruptcy creates a long-term negative mark on your credit report that will make qualifying for credit of any kind hard, if not impossible.

Related: How to Discharge Student Loans in Bankruptcy

Private student loans

Private lenders like Sofi and Sallie Mae don’t offer loan repayment options or programs that let borrowers bring their accounts current after the loans have defaulted, been charged off, and transferred to collections.

To get your private loans out of collections:

  • Ask the debt collector about establishing a payment plan.

  • Negotiate a payoff for a lump sum, monthly payments, or a combination of the two.

Refinancing is typically out of the question. Missing student loan payment kills your credit score and makes it nearly impossible to meet the eligibility requirements to refinance. But one company works specifically with borrowers that have defaulted on private student loan debt: Yrefy.

You may also want to consider bankruptcy, which is somewhat easier (though still a last resort) for private loans compared to federal debts.

Learn more: Settle Student Loans for Pennies on the Dollar

Rights in collections

Debt collectors have a notorious reputation for using any means possible to get borrowers to pay up, but luckily the Federal Trade Commission (FTC) has made it illegal for them to use abusive, unfair, or deceptive tactics.

Knowing your rights as outlined in the Fair Debt Collection Practices Act (FDCPA) is essential if your student loans are in collections.

For example, debt collectors can’t call you before 8 am or after 9 pm, nor can they contact your work without permission. Also, they can’t threaten you or lie about the debt. Keeping these rules top of mind can help you guard against potential violations.

Changes to federal student loan collections

For years, federal student loan borrowers have had to fight an uphill battle with private collection agencies to get out of default and find a successful repayment plan. These companies provided shoddy customer service and ineffective processes, often at a loss to the government.

Last year, the office of Federal Student Aid cut ties with those businesses and shifted the entire collection process to the Default Resolution Group. Borrowers can work with them to apply for the loan rehabilitation program, apply for loan consolidation, or apply for the Fresh Start student loan program.

You can contact DRG at 1-800-621-3115 or review your account information online at

Learn more: What Does Student Loan Permanent Assigned to Government Mean?

Collection agencies for the Education Department

Before the policy change brought federal student loan collections in-house, borrowers had to work with one of these companies to resolve their defaulted loans:

Want to get your loan out of collections?

Dealing with creditors and debt collectors is never fun. Sometimes it’s downright intimidating. They are professionals that deal with loans for a living, and you’re just trying to clean up a mess. I’ve helped thousands of people like you escape financial hardship for all types of loans and lenders.

Schedule a call with me today. Let’s work together to get a game plan to tackle this problem in a way that fits your current situation and future goals.

UP NEXT: Defaulted Student Loan Forgiveness: All Your Questions, Answered

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