Federal student loan debt is never sold to a collection agency. Instead, the federal government assigns defaulted student loans to a debt collector to handle the debt collection process.
They'll do this only after your federal student loan defaults.
On the other hand, private student loans may be sold to a debt collector depending on the private lender.
If that happens, you may be able to negotiate a student loan settlement that significantly lowers the outstanding balance due.
Refinancing, however, is usually not an option.
The reason why this happens is that in the process of defaulting, your credit score likely took a significant hit. Your low credit score may make it hard to find a lender willing to refinance your debt — especially at a competitive interest rate.
Plus, it's hard to convince a new bank to pay off your old loans when you failed to make your monthly student loan payments on your old loans.
Click here to learn When Does a Student Loan Default?
When can student loans go to collections?
Federal student loans are eligible to go to collections after you miss 9 consecutive monthly payments.
When that happens, the Department of Education will send your defaulted student loans to the Default Resolution Group in Greenville TX.
Once there, your loans will either stay with the DMC or will be sent to a private debt collector.
If your loans are sent to a private debt collector, that will be the company you need to work with to fix your defaulted federal student loans.
There's nothing you can do to change which collections agency your loans were sent to. That decision is made solely by the U.S. Department of Education.
The only way to get your loans away from that agency is to get out of default.
Most federal student loan borrowers have 3 options for getting out of default:
- negotiate a student loan settlement
- apply for the student loan rehabilitation program
- apply for a Direct Consolidation Loan
Which option is right for you depends on your personal finances and your eligibility for loan rehabilitation or consolidation.
Private student loans typically go to collections after the loan is charged off.
In my experience, a lender charges off private student loans after a borrower goes about 120-180 consecutive days of nonpayment. Until then, your account is in the form of delinquency.
When your account is delinquent but not yet in default, your lender or loan servicer will typically offer you interest-only repayment plans or grant you a forbearance/deferment. But those are only temporary loan repayment options.
Unlike federal student loans, there is no private student loan rehabilitation.
Likewise, there's no consolidation loan program for private student loans.
Usually, your only option to resolve the default is to pay the balance in full or negotiate a student loan settlement.
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 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), 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. Those collection costs can be as much as ~25%.
Click here to learn How to Get Student Loan Collection Fees Waived
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.
Those involuntary options include:
- an administrative wage garnishment,
- tax refund offset, treasury offset, and
- Social Security benefit payment offset.
Lastly, you lose access to federal student aid and eligibility for loan forgiveness. Also, a default status is added to your credit report for each of your defaulted loans. The default status will cause 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 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.
Here are the only things a private lender can do to you before they get a judgment against you:
- contact you, your cosigner, and other people who they rightfully have phone numbers for
- report negative information to the credit bureaus
- demand the loan balance in full and
- add collection costs (if the promissory note allows).
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:
- Enter into the loan rehabilitation program
- Consolidate defaulted student loans
- Agree to a payment plan
Which is right for you depends on several 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 made 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 retirement makes way more sense to me than it does to repay old student 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.
You can also call the Default Resolution Group at 800-621-3115 to get the contact information for the collection agency.
Before you call the collection agency, remember this:
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. That would be against the Fair Debt Collection Practices Act (FDCPA).
But there's a massive difference between 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:
- Educational Credit Management Corporation (ECMC)
- Trellis (formerly Texas Guaranteed Student Loan Company)
Click here to learn about FFELP Loan Forgiveness