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This guide will explain what you need to know about student loans in collections and how you can recover financially if you have loans you can’t pay.
Why your student loans were sent to collections
If you stop paying your student loans for several months, your debt will enter default and collection activities could be initiated against you.
If you have federal student loans and you miss 270 days of payments (about nine months), your loans will typically go into default. If you have Perkins Loans, you can go into default immediately after a missed payment.
Previously, the Department of Education would sell defaulted loans to private collection agencies, but that’s no longer the case. In 2021, the department announced a change in that policy. Today, collection activities are managed by Federal Student Aid’s Default Resolution Group.
If you miss payments with your private lender, on the other hand, you could have your debt sold to a private collection agency. This can happen after as few as 90 days of missed payments, although the timeline varies by lender.
What happens if you have student loans in collections?
Whether you have federal or private student loans, the consequences of defaulting on your debt can be severe. These can include:
- Loan acceleration: Your entire loan balance often becomes due immediately, including any unpaid interest.
- Damaged credit: Your credit will be significantly impacted by defaulting on your debt, and it can take years to recover. This will make it more difficult to borrow in the future, such as a car loan or mortgage.
- Loss of federal loan benefits: Defaulting on your federal loans means you’ll no longer have access to federal protections. For example, you’ll be ineligible for deferment or forbearance, and you can no longer choose your repayment plan.
- Ineligibility for future aid: You won’t be able to access federal student aid such as loans or grants until your loans are in good standing. This can make it difficult to return to school or finish your degree.
- Cash seizure: Your wages can be garnished before they even hit your bank account, and government transactions such as a tax refund or Social Security payments can be seized as well.
- Restricted assets: You may be barred from buying or selling real estate or other assets.
- A lawsuit against you: Your loan holder can take you to court in an attempt to make you pay up.
- Added fees: You’ll likely be on the hook for collection costs and court fees, which can add a significant amount to what you owe.
Related: What is the statute of limitations on private student loans?
How to get your student loans out of collections
If your loans are in default or you have student loans in collections, don’t ignore it. You can minimize the damage by being proactive and taking immediate steps to deal with the problem. This means:
- Gathering your loan documents so you can understand your obligations.
- Reaching out to your loan servicer to understand the status of your loan and whether it has been sold to collections.
- Establishing contact with the collection agency to discuss your options.
The specific steps you could take to get your student loans out of collections vary depending on whether you have federal or private loans.
Federal student loans
Here are some of your options to get federal student loans out of collections and return them to good standing:
- Fresh Start program: This is a temporary, one-time program offered by the Department of Education; contact your loan holder to enroll. Once approved, your loans will be transferred to a loan servicer and put back into repayment status. You’ll have to select a repayment plan and begin making payments, and the default will be removed from your credit record.
- Rehabilitate your loans: You can rehabilitate Direct Loans or FFEL loans by entering into a written agreement to make nine reasonable, affordable payments over a 10-month period within 20 days of the due date. The amount of a “reasonable” payment is set by your loan servicer and based on your discretionary income.
- Consolidate your loans: You can get out of default by consolidating your loans into a Direct Consolidation Loan. You must either make three consecutive, full, and on-time payments on your defaulted debt, or agree to repay the consolidated loan on an income-driven plan.
- Make a lump-sum payment: While few can afford to do so, you can pay off your entire outstanding loan balance in full to get out of default. If you need help, consider selling some assets, borrowing money from family, or crowdfunding cash from your friends.
Private student loans
Here are some of your options to get private student loans out of collections:
- Dispute the debt: If the debt collector can’t prove you owe the debt, then you generally won’t have to pay it. The collection agency must provide written proof validating their right to collect the debt, as well as instructions for disputing it, upon your request. The Consumer Financial Protection Bureau offers sample letters to dispute debt with a collector.
- Negotiate a settlement: You may be able to offer a single payment or a limited payment plan that allows you to pay less than you owe, in exchange for getting out of collections. Many collectors accept this because they’d rather borrowers repay some money rather than none of it.
- Make a lump-sum payment: If you can afford to pay off the entire balance due, you’ll no longer be in collections.
- Declare bankruptcy: You may be able to get private student loans discharged in bankruptcy if you can show that paying them back would be an undue hardship. While it’s generally more difficult to get student loans discharged than other types of debt, it’s still possible in some circumstances. Keep in mind that declaring bankruptcy should be a last resort.
Related: Private student loan forgiveness: Is it possible?
How did the payment pause affect student loans in collections?
If you have federal student loans, you may have benefited from special protections thanks to COVID-era policies. In 2020, payments were paused, interest rates were set to 0%, and collection efforts were halted. These benefits were extended many times, but are now set to expire on Sept. 1, 2023. Your first loan payment will be due starting in October.
If you haven’t yet restored your loans to good standing, consider doing so with one of the methods above before the pause ends. If you’re not sure where your defaulted loans stand, contact the Default Resolution Group online or by phone at 1-800-621-3115.
What debt collectors can’t do
If you have student loans in collections, you can face serious consequences including possible garnishment of your wages. But you do have rights, and there are certain things debt collectors can’t do, including:
- Contacting you very early or very late.
- Contacting you at work, if you aren’t allowed to receive personal communications there.
- Using social media to post publicly about your debt.
- Harassing you or anyone else via phone, text, or email, including making repetitive phone calls, using profanity, or threatening harm.
- Lying to you about their collection efforts, such as claiming you’re being sued when you aren’t.
Be proactive about addressing student loans in collections so you can fix your financial situation as soon as possible. If you have student loans in collections or are worried about having your loans sent to collections, take action today to find a solution.
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