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?

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?

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 do 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 status of the collection 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 loans with bankruptcy. While student loans are hard to discharge with bankruptcy, it’s not impossible if you can prove “undue hardship upon you and your dependents.” The most common way to prove that is by 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.

5 Ways to Get Your Student Loans Out of Debt Collection:

Student Loans Out of Debt Collection

A student loan is made to help students. But somehow it does not fulfill its purpose. The loan is used to pay educational expenses at once.

You feel relaxed after paying your fees but the other main thing is to pay your student loan back. Bank gives students strict criteria to repay a loan.

Debt collection of student loans increases with a high rate. Because

debt collector gives you a very short time and demands full repayment of the debt.

There are two main kinds of student loans. The one is a private loan and the other is a federal loan. A private loan is a short term and a Federal loan is a long term.

It is easy to repay the federal loan but you may find it difficult to meet its criteria. When you receive any scholarship amount from the government, you can not use it.

Debt collectors use this amount as the repayment of your loan. Also, tax refunds and other benefit payments are used as defaulted student loan repayment.

This is not a very good situation but you can stop this by repaying all the loan payment. Also, you can follow these five steps to take your student loan out of debt collection.

1. Dispute the Debt:

Make your debt collector have the right information about your loan. There are chances that you do not own any money.

Maybe someone has taken this money by using your name. Also, your student loan goes into debt collection by mistake. Make a list of all your transactions with the correct amount and date.

It will help you to review your small account details with ease. You can check all the dates and amounts of money that ae listed. Review all your bank statements including your student loan.

If you find out any mistake then you can create a dispute. This dispute is created between the loan service provider and top credit reporting agencies.

There are three or more best credit reporting agencies. These companies will help you until the problem is solved.

It is considered as the best practice to check your records before giving any student loan payment. To resolve the issues send your account documentation to the student loan provider.

You can also directly contact the one who sends you an e-mail about the debt. In this way, your problem will be solved without creating a dispute.

2. Settle your Debt:

There are two types of student loans private and federal. Debt can be applied to both of the accounts. You can get your student loans out of debt collection by settling the debt.

Tell your condition to the provider as soon as possible. Explain all your financial condition and study expenses. This will create sympathy in the loan provider’s heart.

Also, the debt collector may decrease the debt amount. Settling your debt can be difficult but it is not impossible. Try your best to convince the debt collector.

Before making any deal it is important to have a good amount of money with you. Make sure the agreement is in writing.

This will give you surety and you feel burden-free.

3. Pay the Amount Owed:

It is better to pay all your student loan money to get out of debt collections. But, it may be not possible for you as you do not have such a big amount of money.

In such a situation, take money from your friends and relatives. Apply for part-time jobs to make a large amount of money in a short time.

You may find these options, not as a good solution but you need to get out of the debt collections.

Debt collections can have long term consequences and damage your credit. So try to get out of it as soon as possible.

4. Consolidate or Rehabilitate Your Loans;

Consolidation and rehabilitation are the best way to return your loan amount. But there is one drawback. Only the people who have federal loans can directly apply for both.

Your loan provider helps you to divide the loan payment that you can afford to pay monthly. To become eligible for consolidation, you have to pay this amount for three months.

In case of rehabilitation, you pay the amount for nine months consecutively. The only condition is that you pay money on time.

Students who take private loans can apply for consolidation only.

As a student, it is difficult to become eligible for consolidation or rehabilitation. But if you manage to qualify it, the loan repayment will become easy.

5. Declare Bankruptcy:

Bankruptcy is the only option left when you can not take your loan out of the debt collection by using other ways.

It can be difficult to take student loans out by declaring bankruptcy. It is a big step that you declare bankruptcy. You submit your medical reports in court to prove that you can’t work.

Also, you prove that by maintaining a standard lifestyle it is not possible to repay a student loan.

This decision can have an impact on your life for many years. Try to use other legal possible ways before declaring bankruptcy.

How do I Deal with Student Loans In Collections?

You have some rights when your student loan goes to debt collection. These rights save you from the misbehaviors of debt collectors. Early morning or late night debt collectors will not call you at such inconvenient times.

They will not call you when you are at your workplace if you write this in agreement. They will not contact your related person. Debt collectors must send you a written letter.

This letter will tell you the amount of money you owe and to whom. If necessary, they will tell you how to dispute your loan charges.

At any moment, if you think your rights are violated you can file a complaint against them. You can take your loan back from debt collection by using different methods.

After getting your loan back try to avoid going back to debt collection. Make sure to have selected the right plan for you. Try to be active in paying loan payments.

If you miss any payment, your student loan will go back to debt collectors. There are two options for you if you still can not pay your loan payments.

Loan Deferment or Loan for Bearance:

In loan deferment, you can stop giving loan payments temporarily. Also, during this time no interest is added. You are eligible for this when you are studying or unemployed.

Loan deferment gives you all the necessary benefits that you need. If you do not have money, you can take a break and during this time save money.

So, after the temporary limit is over you can pay money on time. This process is burden less and helps you to clear your loan.

Forbearance provides fewer benefits than deferment. It will keep you out of default but adds interest to your loan.

Like deferment, you can also stop giving money for up to 12 months. You are eligible for loan forbearance when you are ill or have financial crises.

It is easy to meet the criteria of both loan deferment and forbearance. According to your situation, you can select one at a time.

How Long Can Student Loans be In Collections?

Student loan goes into debt collection when you do not pay loan money on time. Time duration depends upon the amount and type of loan.

Federal loans provide you big loans. You have 10 – 25 years to repay your federal loan. As time passes, the interest amount increases.

Load providers give private loans. The amount of money is less than federal loans. For private student loans, the time limit after default is 6 years. Like federal loans, interest is also added in private loans.

If you have a large loan amount and less repayment time then you will pay a high amount every month. Try to save more money to bear this expense.

Conclusion:

Criteria to take student loan is very difficult. Whether it is a private loan or federal loan both have complex terms and conditions.

If you take a loan, you are bound to give money back in a very short period. If you miss any student loan payment, it will go to debt collection.

After getting into debt collection, conditions become worse and worse. Your cash rewards will automatically be used by debt collectors as your loan repayment.

As a student, you will bear more and more pressure as time passes. To avoid such a situation, find a part-time job for yourself. In this way, you can make money to repay your student loan.

If possible, take money from your friends and relatives. You do not get burdened in this way. You can repay them when you have money and they will not add interest.

But, do not get too relaxed in this case. Pay money at a proper time. So that your friends or relatives not get offended with you.

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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