Facing a collection agency for student loans? Take these 3 steps

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Stanley tate

Student Loan Lawyer

$400M+ student loans managed

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2022 Update: In 2021, the Department of Education announced that all federal loan delinquencies for the loans it controls would be managed by the Default Resolution Group (DRG) instead of by various collection agencies. Read my article on DRG for up-to-date details on how to contact DRG and what to do if your federal loan is moved to collections.

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 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.

What is DMCS FSA Collections?

DMCS, or Debt Management and Collections System, is the most significant component of collections within Federal Student Aid, which includes the Treasury Offset Program and administrative wage garnishment. It's the central database of information for borrowers with federal student loans in default. DMCS uses MyEdDebt to process defaulted accounts through the National Payment Center in St Louis.

Student Loan Debt Collectors

This November, the head of federal student aid told private student loan debt collectors that collecting on defaulted loans would be handled by contractors the Department of Education hired last year.

“This step is one part of a long-term strategy to improve defaulted federal student loan collections and help FSA more effectively support borrowers who are at risk of defaulting on their student loans,” Richard Cordray, chief operating officer of the department’s office of Federal Student Aid, said in a statement.

This change affects about 5.2 million borrowers in default — meaning they have gone almost a year without making a payment — on about $114 billion in federal student debt.

US Department of Education collections have moved in the short term to the Default Resolution Group, which is run by Maximus Federal Services, as the single source of contact for borrowers. In the future, servicing for defaulted student debt will move to the following contractors:

What if I set up a loan rehabilitation agreement? If you previously set up a loan rehabilitation agreement with a private collection agency, contact the Default Resolution Group, 800-621-3115, about your next steps, including making the remaining payments.

Department of Education Collection Agencies

Before the policy change brought federal student loan collections in-house, borrowers had to work with private debt collectors to get out of default. Here’s a list of those companies:

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 costs 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, you can settle private student loans 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:

Phone: 800-621-3115

Mail: 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.

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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