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.
On the other hand, private student loans may, depending on the private lender, be sold to a debt collector.
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 is that in the process of defaulting, your credit score likely took a significant hit. 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.
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 Debt Management and Collections team 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.
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.
How to find out which collection agency has your loans
The easiest way to find out who has your defaulted federal student 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 be connected to an automated system.
The automated system will give the phone number to the collection agency that some of 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.
What happens when you're sent to student loan collections?
Here's what happens when your federal student loans are sent to a collections agency:
- Collection fees are added to your balance
- You're no longer eligible for federal student aid)
- You're no longer eligible for loan forgiveness programs
- You're no longer eligible for income-based repayment plans
The debt collection agency can also send a wage garnishment order to your employer, and they can also offset your Social Security benefits and offset your federal tax refund. (And, yes, they can do all three at the same time.)
The collection costs added to your loan balance can sometimes be waived through the loan rehabilitation program.
Consolidation, on the other hand, adds the collection costs to your overall loan amount.
So you know, you can regain eligibility for financial aid, loan forgiveness programs, and loan repayment options based on your income once you get out of default.
Removing student loan collections from your credit report
Neither your lender nor your loan servicer will remove student loan collections from your credit report.
Consolidation nor loan rehabilitation will remove the late payment history.
Likewise, a student loan settlement won't remove that history either. (It's near impossible to get the creditor to agree to remove the negative information.)
So what do you if you're trying to increase your credit score?
I suggest you work with a qualified credit repair professional.
My clients who hired a professional have told me they could get the bad information removed from their credit report with all three credit bureaus.
Is hiring someone guaranteed to work? No. But it has worked for other borrowers in the past. It may work for you.
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