You default on your federal student loans when you miss more than 9 months of student loan payments.
If you're in a deferment or forbearance, you're not in default. Your loans are still in good standing.
If you've missed a handful of required monthly payments, you're not in default. You're just in a delinquency.
Again, you default on federal student loans when you go more than 270 days without making your required payments.
When you default, your defaulted student loans will go to collections.
They'll either be sent to:
- the Default Resolution Group/Debt Management and Collections System or
- a guaranty agency like Trellis, MOHELA, Kentucky Higher Education Student Loan Center, etc.
Where your defaulted loan is sent for collections depends on who owns your loan.
If the U.S. Department of Education owns your defaulted loan (e.g. Direct Loans) then the loan will be sent to the Debt Management and Collections System.
Once there, your loans may be sent to another debt collector for servicing.
But if your loan (typically FFEL or Perkins Loans) is owned by a third-party, like Ascendium, then the loan will be sent to that guaranty agency for collections.
Watch this video for further explanation of this process.
What happens when student loans go to collections?
Four things happen when a defaulted federal student loan is sent to collections.
First, the entire loan amount becomes fully due and payable. Plus, the federal government adds collection fees to your balance.
Second, the debt collection agency attempts to contact you to set you up monthly payments under either a voluntary repayment agreement or, if you’re eligible, the loan rehabilitation program. (Your monthly payment amount may be based on your income, expenses, and family size.)
Third, while they’re doing that, the debt collection agency is also beginning to explore involuntary repayment options available to them.
Lastly, you lose access to federal student aid and eligibility for loan forgiveness, and a default status is added to your credit report for each of your defaulted loans, which causes your credit score to drop even further.
The process is different when a private student loan is sent to collections.
When private student loans are sent to collections
Unlike with federal student loans, a debt collection agency collecting on a defaulted private student loan cannot take your tax refund or garnish your Social Security benefits.
That power is exclusive to federal student loans.
Private student loans also are unable to issue a garnishment for your wages without a court order.
To get a court order, they first need to sue you and get a judgment from the court authorizing them to garnish your wages.
How long will they take to sue you?
In my experience, I rarely see student loan borrowers sued soon after their loan is sent to collections.
Typically, the collection agency or the lender wait to sue until the statute of limitations is about to run out.
Are student loans sold to collection agencies?
Federal student loans are never sold to a debt collection agency (at least, not at a steep discount).
Instead, your defaulted loans are moved from your loan servicer to the loan holder to a private collection agency. When you get out of default, your loan, if it still has a balance, will be sent back to the loan servicer to continue repayment.
Private student loans are often sold to collection agencies.
But again, they're not usually sold at a steep discount — at least not in the first couple of years that you're in default.
How to get student loans out of collections
The only way to get a private student loan out of collections is to pay it off or negotiate a student loan settlement.
Federal student loans, thankfully, offer more options to getting loans out of collections.
In addition to paying the loan off or negotiating a settlement, you can also:
Which is right for you depends on a number of factors.
When advising a client, I typically ask:
- How old they are
- If they're married
- How many children do they have
- How much do they earn annually
- How much have they earned historically
- Are they likely to receive an inheritance
- How much have they saved for retirement
Knowing the answer to those questions and how much they owe in federal student loan debt, helps me decide whether settlement, consolidation, or rehabilitation are the right choice for them.
For example, if they’re 70 years old, owe $200 thousand in federal student loan debt, and they have enough money in their retirement to settle their loans, I would likely advise them not to do that. Instead, the smarter move, in my opinion, is to keep the money in retirement, get the loans out of default with consolidation or rehabilitation, and when they’re out of default, place the loans in an income-based repayment plan.
Sure, their balance will continue to grow. But so what! They’ll likely never repay the loan before they die. And keeping that money to fund their retirement makes way more sense to me than it is to repay their loans.
Help with student loans in collections
You can always contact the debt collection agency to get help from them with your defaulted loans.
If you don't know which agency has your loans, check the National Student Loan Data System (NSLDS) at studentaid.gov. The
But here’s the thing you have to keep in mind:
You’re not their client.
Their client is the Department of Education or the private lender that hired them.
They don’t have a responsibility to tell you the repayment options that are in your best interest.
Yes, they’re not supposed to lie to you.
But there’s a huge difference in not lying to you, and doing what’s in your best interest.
If you want help from someone that has to do what’s in your best interest, hire a student loan lawyer.
Of course, you can always schedule a free 10-minute phone call with me.
List of Student Loan Collection Agencies for Federal Student Loans
- Account Control Technology, Inc.
- Action Financial Services
- Alltran Education
- Bass & Associates
- Central Research
- Coast Professional Inc.
- Credit Adjustments Inc.
- Delta Management
- FH Cann & Associates
- FMS Investment Corp.
- GC Services
- General Revenue Corp.
- Immediate Credit Recovery Inc.
- National Credit Services
- National Recoveries Inc.
- Pioneer Credit Recovery, Inc.
- Professional Bureau of Collections of Maryland
- Reliant Capital Solutions
- Windham Professionals, Inc.
If you have loans made under the Federal Family Education Loan program, your defaulted student loan could be with a guaranty agency like: