Student Loan Collections: what is it and how to get out?

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Student loans can be overwhelming. If your student loan has gone to collections, don’t feel bad. You’re not alone.

The average default rate after 3 to 5 years of paying off your student loans is 11.5%. It’s even worse if you attended a for-profit college. Out of 100 students who attended for-profit colleges, 43 defaulted on their loans within 12 years of starting college. 

Having your student loan go to collections is no joke. If you don’t do anything about it, you can end up in even more financial trouble.

But don’t worry, this can be fixed. We’re going to go over how you can get your student loan out of collections and stay out.

Let’s start with how this happened in the first place.

How your student loans ended up in collections

Normally your student loan goes to collections because you stopped making regular payments on the loan for an extended amount of time.

The first step towards collections is defaulting on your student loan. It’s easy to confuse defaulting on your loan and going to collections. But there is a distinction between the two. All student loans in collections are also in default but not all loans in default are in collections.

Student loans go into default when you haven’t made a payment for 270 to 360 days. The exact amount of time depends on the type of student loan you have.

Once your student loan is in default, your loan holder may place your loan with a collection agency.

What happens when your student loan gets sent to collections

Having your student loan go to collections can have some serious financial consequences.

When the government hires a private collection agency to collect your student loan, it’s not cheap. The government normally pays the collection agency on a commission basis and then passes the cost onto you.

The commission can cost you up to 40% of your student loan balance depending on what kind of student loan you have and whether you are rehabilitating or consolidating your loans.

This means if your student loan debt is at $10k, for every dollar you put towards it, $0.40 (40%) will go towards paying the collection agency and only $0.60 (60%) will go towards paying your loan balance. This increases the time it takes to pay off your whole loan which will increase the total amount of interest you pay.

What are the consequences of having your student loans go to collections?

Along with the collection agency fees, having your student loan go into default (and collections) will have the following negative consequences:

  • Lower credit score. Defaulting on any kind of debt will lower your credit score once it’s reported to the credit bureaus. This can negatively impact your credit score for up to 7 years. A lower credit score means a higher interest rate on any loans you take out and impact your ability to get new loans.
  • Potential wage garnishment. The government can garnish your wages or even take your tax refund which is known as a “Treasury offset”. This means a lower monthly income which can mean you might need to use your credit card more which means more debt.
  • You are no longer eligible for more federal student aid.
  • Potential legal action against you. Your loan holder can take you to court.
  • You are no longer eligible to receive deferment or forbearance on your student loan. You also lose the ability to choose a repayment plan.
  • Your school may withhold your academic transcript. This is up to your school and not the loan holder or the US government since your academic transcript is the property of the school. They may withhold it until the entirety of the loan is paid off.

Hopefully, this information has scared you enough to not let your student loan go to collections. If you’re already in collections, let’s talk about how to get out.

How to get your student loan out of collections

Unfortunately, just like all other debt, ignoring it won’t make it go away. We need to deal with it as soon as possible.

In fact, if you just landed in collections, you may be able to make a qualifying payment which will make you less than 270 days (for direct loans) delinquent. Doing this could get your student loan out of default and out of collections.

If you can’t make a qualifying payment or doing so won’t get you out of collections, don’t fret. You still have a few options available to you.

  • Student loan rehabilitation. Getting loan rehabilitation on your student loan means that the Department of Education will determine a repayment plan consisting of nine payments. These payments are usually equal to 15% of your annual discretionary income and you have to voluntarily make those payments within 10 months. Once you do so, your loan’s default status is removed and if your loan was in collections, it’s removed from that also.
  • Student loan consolidation. Consolidating your student loans won’t remove the collections status outright, but it could make it easier for you to make qualifying payments to remove the status. Consolidating defaulted student loans makes the consolidated loan eligible for deferment, forbearance, and loan forgiveness.
  • Repayment in full. The best way to get your student loan out of collections and default is to pay the full amount of the loan and get rid of it once and for all. Unfortunately, this option isn’t feasible for most people in collections.
  • Discharge student loan with bankruptcy. While student loans are hard to discharge with bankruptcy, it’s not impossible if you can prove “undo hardship upon you and your dependents.” The most common way to prove that is using the Brunner test. If you’re successful, your student loan balance will be canceled completely. The act of filing for bankruptcy will protect all your debt, including your student loan, from the collection agencies.

How to avoid getting having your student loans go back to collections

If you got your student loan out of collections and default, give yourself a pat on the back!

Now you just need to avoid going back to collections. The key to doing so is getting on a repayment plan you can afford without missing any payments. If you do happen to miss a payment, remember to act on it fast to remedy the situation rather than letting your loan go back into default. Loan rehabilitation is a one-time deal, so if you used it to get out of default once, don’t expect to be able to do so again.

Changing your repayment plan to one you can afford is 100% free and can be done at any time. You just need to contact your loan servicer to do so. Before you contact them, however, you can use the Department of Education’s free repayment estimator to find out what repayment plans you’re eligible for and which ones you can afford.

Just remember, if you choose a repayment plan that offers lower monthly payments, you’ll end up paying more in interest in the long run. So if you’re in a tight spot, you can choose a lower repayment plan and once you’re back on your feet financially, you should go back to the original repayment plan.

If even the lowest repayment plan is too much for your current financial situation, you should consider deferment or forbearance.

Deferment means that you can stop making payments on your student loan for a certain amount of time without any interest accruing. You normally qualify for a deferment if you’re enrolled in college, unemployed or are active military. Deferment can last up to three years.

Forbearance also allows you to stop making payments, however, interest does accrue, so it’s not as advantageous as a deferment. But it may be your only option. You normally qualify for forbearance if your monthly loan payments are more than 20% of your gross income, you’re sick, or having financial difficulties. Your loan servicer is the ultimate judge when it comes to determining your eligibility for forbearance.

Looking for student loan forgiveness? Here’s a guide I wrote detailing all your options:

Have you gotten your student loan out of collections? I would love to hear your stories in the comments below.


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