How to Get Student Loans Out of Collections When it Happens

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Stanley tate

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​​​​Student loans go to collections after you fall behind on monthly payments and eventually default. You can get federal student loans out of collections by negotiating a lump sum payoff, applying for loan consolidation, or entering into the loan rehabilitation program. There’s only one option to remove private student loans from a collection agency: settlement.

Can student loans go to collections? Absolutely. When a borrower misses several monthly payments consecutively and defaults on their student loan debt, the loans will be moved from the loan servicer to a debt collection agency.

What happens next depends on the type of loan that went into default.

The U.S. Department of Education sends its defaulted student loans to the Default Resolution Group — without selling the debt. The DRG works with borrowers to recover from default.

But until your debt is repaid, DRG can also penalize you while your education loan is in collections by:

  • Garnishing (withholding money from) your paycheck.
  • Garnishing your tax refund.
  • Withholding Social Security benefits.
  • Disqualifying you for certain home loans.

In contrast, some private lenders sell their defaulted loans to a debt collector at a discount. Others send the loans to collections but retain ownership of the debt.

Keep reading to learn how to get student loans out of collections.

What happens if my student loans goes to collections?

When student loans go to collections, the lender 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
  • Loan forgiveness programs like Public Service Loan Forgiveness (student loans in collections cannot be forgiven until the loan has been returned to good standing)

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

How to get your federal 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 portion of the principal balance, but you have to pay the reduced amount within 3 months.

Read more about the student loan settlement process.

2. Rehabilitate your loan

Loan rehabilitation returns your loans to good standing after you make 9 monthly payments. Rehabilitation can remove collection fees and erase the default status from your credit history, but not the missed payments.

Read more about how to rehabilitate student loans.

3. Consolidate one or more student loan debts into a new loan

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 studentaid.gov.

Read more about how to consolidate defaulted student loans.

4. Discharge your student loans in bankruptcy

You may be able to have 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 only 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.

Read more about discharging student loans in bankruptcy.

How to get your private student loans out of collections

Private lenders don’t offer the same options to get student loans out of collections as federal lenders.

To get your private loans out of collections:

  • Ask the debt collector about establishing a payment plan.
  • Negotiate a payoff paid using 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.

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

How to avoid student loan default

It’s best to stop loans from going to collections in the first place. However, the standard payment for student loans may be overwhelming or even impossible for many borrowers.

Before you go into default on federal student loans, you can avoid collections by:

To avoid defaulting on your private student loans, contact your loan servicer about:

  • Temporary payment pauses.
  • Refinancing.
  • Deferment or forbearance options (if available).

How to find student loans in collections

You can find federal student loans in collections by checking studentaid.gov. When you log in, you’ll see a list of all the federal loans you’ve borrowed and which company services the loans.

Another way to find federal loans in collections is to contact the Default Resolution Group at 1-800-621-3115.

  1. Ask the representative first to check the DRG’s record for any student loans you have in default with the Education Department.
  2. Next, ask the representative to check the National Student Aid Data System to see if you have any FFEL or Perkins Loans in default.
  3. If you do, get the contact information for the debt collector and then call to learn your loan repayment options.

Finding private student loans in collections can be challenging, especially if the loans have disappeared from your credit report after being in default for more than seven years.

Start by contacting the student loan servicer who had the loans before they were charged off. At a minimum, the servicer should be able to tell you who the loan holder is and provide you with the company’s contact information.

From there, you may need to call several companies to find out who currently holds your loan.

Learn more: Why Aren’t My Student Loans On My Credit Report?

Changes to federal student loan collections

Until recently, the Education Department hired private debt collection agencies to collect defaulted loans.

Last November, the head of Federal Student Aid announced that the department would quit outsourcing collections to several contractors and instead make one company responsible for its federal student loan collection process: the Default Resolution Group.

You can contact the DRG at 1-800-621-3115. You can also check your account and see any previous payments from wage garnishment and tax refund offsets online at myeddebt.ed.gov.

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

US Department of Education Collections Agencies

Before the policy change brought federal student loan collections in-house, borrowers had to work with one of the following 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 student loan borrowers like you dig out of default and back into good standing.

Schedule a free 10-minute 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 your future goals.

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

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I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

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