Student Loan Debt Collection: How it Works When You’re in Default

Updated on June 2, 2025

Quick Facts

If your student loans are in collections, you’re at risk of wage garnishment, tax refund seizures, and credit damage. The only way out is to bring the loan back into good standing is through either rehabilitation, consolidation, or full payoff.
You can’t qualify for federal forgiveness programs like IDR or PSLF until you’ve resolved the default. Involuntary payments, like garnishment or offsets, don’t count toward student loan forgiveness.
For private student loans, collectors must prove they own the debt. You can request a Debt Validation Letter and check the Chain of Title to challenge invalid or unverified collection attempts.

Overview

If your student loans are in collections, you’re probably already feeling the consequences and looking for a way out. After a five-year pause, the Department of Education has resumed involuntary collections on defaulted federal student loans, leaving millions of borrowers scrambling to regain control.

This shift began on May 5, 2025, when the Trump administration restarted enforcement actions that had been on hold since the pandemic. According to Education Secretary Linda McMahon, the move is about protecting American taxpayers and walking back what the administration calls “irresponsible student loan policies.” “Loan balances don’t just disappear,” she said, ending any hope of mass loan forgiveness for borrowers in default.

If you’re stuck in collections, this guide will help you understand what’s happening, what forgiveness looks like now, and how to bring your loans back into good standing.

Note: This guide covers federal loans only, including Direct, FFEL, Stafford, and Perkins. If you have loans with Sallie Mae, FirstMark, CollegeAve, etc., check out our guide to private student loans in collections.

How to Get Student Loans Out of Collections

If your federal student loan is already in collections, this section walks through your options to get back in good standing: rehabilitation, consolidation, paying in full, or requesting a hearing to pause garnishment.

Most borrowers first find out their loans are in collections after getting a notice from the Default Resolution Group. If that’s where you are, here’s what you can do next to stop collections and prevent further damage.

Loan Rehabilitation

Loan rehabilitation is the most credit-friendly way to get out of collections. You’ll work with your loan holder to set up a rehabilitation agreement, which requires you to make nine affordable monthly payments based on your income. These payments must be made within 10 consecutive months.

Once you finish the program, your loan is no longer considered in default, collections stop, and the default is removed from your credit report. Most borrowers also regain access to federal aid and repayment plans. Keep in mind that you can only rehabilitate a loan once—if you’ve already used this option before, it won’t be available again.

Loan Consolidation

Loan consolidation is a faster way to resolve a defaulted student loan and stop collections. You’ll apply for a new Direct Consolidation Loan through StudentAid.gov, which pays off your defaulted loan and replaces it with a new one. To qualify, you must either make three voluntary, on-time payments before consolidating or agree to repay the new loan under an income-driven repayment plan like IBR, PAYE, or ICR.

Once your new loan is processed, collections stop. However, the default will remain on your credit history, and some collection fees may carry over into your new balance. This option is often best for borrowers who need immediate relief or have already used rehabilitation.

Paying in Full

You’re legally allowed to pay off your federal student loans in full to stop collections immediately. This means paying the total amount owed, including any interest and collection fees, in one lump sum. Once the loan is paid off, all collection actions stop.

That said, this option doesn’t remove the default from your credit report, and it’s rarely realistic given how high defaulted loan balances can be. Still, it’s important to know this option exists, especially if you’re in a position to settle the debt completely and want to close out the account.

Requesting a Hearing

If you’ve received a notice of wage garnishment, you have the right to request a hearing within 30 days. This is your opportunity to challenge the garnishment if you believe it was issued in error, if you were never properly notified of your default, or if the garnishment would cause serious financial hardship. While your request is under review, garnishment is typically paused.

To proceed, you’ll need to provide documentation that supports your case. This option doesn’t remove your federal student loan from collections on its own, but it can buy you time to explore rehabilitation or consolidation instead. Related: How to Dispute Student Loans in Collections

What Happens When Student Loans Go to Collections

When federal student loans go to collections, you face serious consequences like wage garnishment, seizure of tax refunds and Social Security benefits, and a loss of future federal student aid. All of this can happen without a court order.

On top of that, not only will late payments and a default status be added to your credit report, but a mark will also be added saying that the “student loan assigned to government collection account.”

Are Student Loans Sold to Collection Agencies

Federal student loans aren’t sold to collection agencies. So if you have Direct, FFEL, Perkins, Subsidized, Unsubsidized, Stafford, or HEAL Loans, those loans will continue to be owned by the federal government or a guaranty agency like Ascendum, Trellis, or ECMC even after the loan defaults.

Private student loans, on the other hand, are often sold to a debt collector after the loan defaults and is charged off. When that happens, you may be able to negotiate a student loan settlement for a lot less than your current balance, simply because the debt collector bought the debt at a discount.

If your loan was sold, the collector must prove they have the legal right to collect. That includes providing a clear Chain of Title. This is a record showing the loan’s ownership from the original lender to the current collector. Without it, they may not be able to enforce the debt. Here’s how Chain of Title works for student loans.

You can also demand a Debt Validation Letter, which requires the collector to verify the debt’s accuracy and legitimacy.

Will Student Loans in Collections be Forgiven?

No, federal student loans in collections are not automatically forgiven. If you have defaulted student loans and collections have started, you must first bring the loan back into good standing through rehabilitation or consolidation. Only then can you qualify for forgiveness programs like Income-Driven Repayment (IDR) forgiveness or Public Service Loan Forgiveness (PSLF).

Involuntary payments like wage garnishment or tax refund seizures do not count toward loan rehabilitation or forgiveness timelines. Since the Fresh Start program ended, there has been no new initiatives offering automatic cancellation for loans in collections.

Can Unpaid Tuition Debt Sent to Collections be Forgiven or Removed?

Typically, no, unpaid tuition debts sent to collections can’t be forgiven through standard student loan forgiveness programs, because these debts aren’t federal student loans. They’re debts you owe directly to your college or university.

If you’re dealing with tuition debt that’s been in collections for years, you might feel stuck, unable to enroll in new classes, transfer, or get your transcript. But you do have some options.

Tuition debts generally have a statute of limitations (usually three to ten years, depending on your state). Once this passes, debt collectors typically can’t sue you, and the debt may drop off your credit report. But be aware: schools may still hold transcripts or block enrollment.

For immediate relief, negotiating a settlement with the collection agency could be your best option. Many students manage to significantly reduce their balances or set up affordable payment plans, helping them get their education back on track.

Bottom Line

If your federal student loans are in collections, you’re probably already feeling it with garnished wages, lost tax refunds, and rising collection costs. It’s not just frustrating. It’s financially draining.

The only way out is action. Rehabilitation, consolidation, or, if possible, settlement are the paths forward. Waiting will only make the damage worse.

Our team helps borrowers like you who are in this exact situation every day. We understand how loan servicers and debt collection agencies operate, and we know how to get you back into good standing with a repayment plan you can afford.

Book a call with our student loan expert.

You’ll get clear answers, a real strategy, and support from someone who knows the system inside and out.

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