When you default on your student loans, a lot can happen. You’ll accrue unpaid interest, late fees and lose eligibility for many student loan programs and financial aid. You could even have some of your income taken away. Perhaps the most invasive option is student loan collections.
When you default on a student loan — either federal or private — it can go to collections if the situation isn’t addressed. While it’s not impossible to get your student loan out of collections, there are some things you should know before attempting to negotiate this situation.
How student loans get to collections
If you fail to make your student loan payments on time, you’ll end up in delinquency and accrue late fees. If you stop making your student loan payments altogether, they’ll go into default and potentially be sent to a debt collector.
A student loan won’t go to collections until it has entered default. Once your loans enter default, the entire balance becomes due, also called acceleration. The lender will then send your student loan to a collection agency, where they will begin attempts to get repayment from you.
Private Student Loan Collections
How and when private student loans go into collections really depends on the lender. Some are more willing to work with you beforehand, others not so much.
Typically, your private student loans will enter default once you’ve gone 120 days without making a payment. However, some lenders will consider the loan in default even sooner.
When private lenders send a student loan to a collection agency, the loan is sold for much less than the original balance. The lender writes the difference off as a loss on their books.
Your credit will take a hit from student loan collections as well. Your student loan account status will be changed to “charged-off,” and you will then have a collection. Both of these measures will sink your credit scores even further after the late payments you’ve accrued.
Debt collectors are notorious for using aggressive tactics to get you to pay. If private student loan collections are affecting your wellbeing and causing you concern, it may be time to call a student loan lawyer.
Federal Student Loan Collections
Federal student loans are much different than private student loans. Your federal student loans will become delinquent after you’re 30 days late making your monthly payment. If you continue missing payments for 270 days, the loan will enter default.
At that point, the lender will send your student loan to one of the Department of Education’s approved debt collection agencies. However, the original lender still owns that loan. The collection agency takes over obtaining payment in exchange for a fee.
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.
Here’s a list of agencies the federal government may assign a defaulted student loan to:
- 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.
Consequences of student loan collections
Having your student loans go into collections creates significant financial consequences. Some you’ll see right away; others can begin to affect you after months or even years.
The federal government can use just about whatever means necessary to get their money back from federal student loan borrowers who don’t pay.
Consequences for federal student loan collections include:
- Wage garnishment
- Treasury offset programs like tax refunds and Social Security benefits garnishment
- Interest capitalization (paying interest on top of interest)
- Ineligibility for further federal student aid (FSA)
- Ineligibility for income-based repayment plans
- Ineligibility for student loan forbearance and deferment, or loan forgiveness
What’s worse, federal student loan collections can enact multiple consequences from this list simultaneously.
The penalties for private student loan collections mainly affect your credit and the credit of your cosigners.
There are also consequences for defaulted private student loans, such as:
- Being reported to the credit bureaus
- Lowered credit scores
- Collection fees added to the loan balance
- Higher interest rates (if you can get approved for any new loans)
It is possible to get collection fees waived in some cases, but your credit will inevitably take a hit, which can trigger its own issues.
How to get your loan out of collections
If you have a student loan sent to collections, you’ll need to work with the collection agency to get your loan out of collections. Avoiding the issue can cause even more problems.
How long do student loans stay in collections? Private student loans in collections have a statute of limitation typically of 6 years. After that, you could be off the hook. However, this is unlikely as the debt collector could sue you and gain permission to garnish your wages. It will also take much longer for your credit to recover.
Federal student loans in collection will stay there until you resolve the issue. There is no cancellation of federal student loans in collections after a period of inactivity.
How do I get my student loans out of collections? There are a few options to get your student loans out of collections. Private student loans can only get out of collections through a full loan repayment or a partial settlement. For federal student loans, you could enter a new payment plan, a rehabilitation program, or a consolidation loan if you can get approved.
How are student loans in collections paid? You can pay student loans in collections directly with the debt collector. However, be sure to have the deal in writing before you send any money.
For private student loans
If you have private student loans in collections, you only have two options, full repayment or negotiating a settlement.
Repaying the entire outstanding balance of your private student loans is highly unlikely. Your student has accumulated interest and hefty collections fees.
This leaves you with negotiating a settlement. Luckily, private student loans can be settled for much lower than the outstanding balance. Typically, private student loan lenders will settle for between 40-70%.
You’ll need to contact the collection agency that has your loan and let them know you’d like to settle your student loan. Then, negotiate an amount you can afford to pay and get the offer in writing.
Some private student loan borrowers are asking if the pandemic has affected their defaulted student loans or if Biden is offering student loan forgiveness. Find out more here.
For federal student loans
Federal student loans like William D. Ford Federal Direct Loan Program Loans (Direct Loans), Federal Family Education Loans (FFEL Program), and Perkins Loans provide a few more options to get out of collections. You still have repayment options and settlement.
The federal student loan rehabilitation program allows you to bring your student loans back in good standing. You’ll need to make 9 on-time monthly payments within a 10-month period. Once completed, the default will be removed from your credit report, and the collections fee waived.
Consolidation can be a good option if you can get approved for a consolidation loan. You’ll combine your defaulted student loan with another in good standing. You’ll be left with one loan with a single monthly payment.
Finally, if your lender allows it, you can work out a new repayment plan. By entering a new payment plan, you can slowly work toward a repaired credit score and paying off your student loans.
Who collects student loans?
How do I find my student loan debt collector? The easiest way to find out which collection agency has your defaulted loans is to contact the Department of Education's Default Resolution Group.
Here’s the contact information for the DRG:
US Department of Education
PO Box 5609
Greenville, TX 75403-5609
When you call in, you'll first have to navigate an automated system. The automated system will give you the phone number of the loan servicer and collection agency that your loans have been placed with — if any.
I say some because if your loans have been sent to more than one agency, the system will not tell you that. So here's what to do instead:
- Hold the line and wait to be connected to a live operator.
- Ask the operator to check to see if all of your loans have been sent to the same collection agency.
- From there, ask the operator to connect you to the National Student Loan Data System. Confirm the same information with that operator.
Want to get your loan out of collections?
Look, 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 want to help you.
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.