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Student Loan Collections: An Overview of the Defaulted Student Loan Collection Process

May 21, 2020

Welcome to the complete guide to Student Loan Collections

Use the navigation below to get started. And if you want to talk with a student loan expert about dealing with student loans in collections, let’s chat.

In 2018, $166 billion in federal student loans were in default. Private debt collection agencies helped to collect $10.4 billion of that outstanding debt.

In 2019, the federal student loan default portfolio grew to $195 billion. Of that total, just under $6 billion is scheduled to be recovered.

What do these numbers mean to you?

Not much I imagine.

I guess the two big takeaways are that (1) you’re not alone in having your student loans sent to collections and (2) the collection process is inefficient.

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If you have loans made under the Federal Family Education Loan program, your defaulted student loan may be with a guaranty agency like:

 

How Student Loans End Up in Collections

Whether federal or private, your student loan is sent to collections after several months of nonpayment.

Federal student loan debt takes 9 months (more specifically 270 days) of missed monthly payments before defaulting.

The timeline for when a private student loan is sent to a debt collection agency varies wildly.

I’ve seen some private student loan lenders (e.g., MOHELA, Discover, Wells Fargo) hold onto their loans until more than a year has passed since a payment was made.

But I’ve seen others like Navient, SoFi, and KeyBank, that send their student loan debt to collections after 6 months of nonpayment.

Regardless of when the loan is sent to a collection agency, the result is the same:

  • Your student loan is no longer with a loan servicer
  • Your entire loan balance is due
  • Your payment options have changed
  • You can’t place your loan into a deferment or forbearance
  • You’re no longer eligible for loan forgiveness

What Happens if Your Student Loans Goes to Collections

What happens when your loans go into default and collections depends on whether the defaulted loans are federal or private.

Federal

Three things happen when a defaulted federal student loan is sent to collections.

First, the entire loan balance becomes due and collection fees are added.

Second, the debt collection agency attempts to contact you to set you up monthly payments under either a voluntary repayment agreement or, if you’re eligible, the loan rehabilitation program.

Third, while they’re doing that, the debt collection agency is also beginning to explore involuntary repayment options available to them. Those involuntary options include: a wage garnishment, tax refund offset, and Social Security benefit payment offset.

⭐ US Department of Education Defaulted Student Loans Aren’t Sold to a Collection Agency ⭐

Federal student loans are never sold to a loan servicer or to a debt collection agency. Sure, federal loans move from company to company for payment and collections purposes. But the loans are never sold to those companies.

Private

Unlike with federal student loans, a debt collection agency collecting on a defaulted private student loan cannot take your tax refund or garnish your Social Security benefits. That power is exclusive to federal student loans.

They also cannot issue a garnishment for your wages without a court order.

To get a court order, they first need to sue you and get a judgment from the court authorizing them to garnish your wages.

How long will they take to sue you?

In my experience, I rarely see loan borrowers sued soon after their loan is sent to collections. Typically, the collection agency or the lender wait to sue until the statute of limitations is about to run out.

The One Good Thing That Happens When Your Loans Go Into Default and Collections

Settlement.

Or at least the option to do so.

In 2018, I negotiated over $1 million in federal and private student loan settlements. In 2019, I doubled that amount.

In each of those settlements, it wasn’t until the borrower defaulted that settlement became an option. Until then, the borrower’s options were limited to deferment or forbearance or making interest-only payments.

Before you get excited, know this:

You typically won’t settle your student loan for pennies on the dollar.

And if you’re trying to settle a federal student loan, you can forget about saving a bunch of money. Federal student loan settlements are expensive. The Department of Education typically won’t settle for less than 85% of the current balance due (less collection fees) payable in 30 to 90 days.

How to Get Student Loans Out of Collections

The only way to get a private student loan out of collections is to pay it off or negotiate a settlement.

Federal student loans, thankfully, offer more options to getting loans out of collections. In addition to paying the loan off or negotiating a settlement, you can also:

  • Enter into the loan rehabilitation program
  • Submit a consolidation application

Which is right for you depends on a number of factors. When advising a client, I typically ask:

  • How old they are
  • If they’re married
  • How many children do they have
  • How much do they earn annually
  • How much have they earned historically
  • Are they likely to receive an inheritance
  • How much have they saved for retirement

Knowing the answer to those questions and how much they owe in federal student loan debt, helps me decide whether settlement, consolidation, or rehabilitation are the right choice for them.

“A debt collector gets paid $1,700 per borrower who rehabilitates their debt, and within three years, about 40 percent of those people re-default.”
Colleen Campbell, Center for American Progress

For example, if they’re 70 years old, owe $200 thousand in federal student loan debt, and they have enough money in their retirement to settle their loans, I would likely advise them not to do that. Instead, the smarter move, in my opinion, is to keep the money in retirement, get the loans out of default with consolidation or rehabilitation, and when they’re out of default, place the loans in an income-based repayment plan.

Sure, their balance will continue to grow. But so what! They’ll likely never repay the loan before they die. And keeping that money to fund their retirement makes way more sense to me than it is to repay their loans.

Help With Student Loans in Collections

You can always contact the debt collection agency to get help from them with your defaulted loans. But here’s the thing you have to keep in mind:

You’re not their client.

Their client is the Department of Education or the private lender that hired them.

They don’t have a responsibility to tell you the repayment options that are in your best interest.

Yes, they’re not supposed to lie to you.

But there’s a huge difference in not lying to you, and doing what’s in your best interest.

If you want help from someone that has to do what’s in your best interest, hire a student loan lawyer.

Of course, you can always schedule a free case evaluation with me.

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Who to Call for Federal Student Loan Garnishments

The Department of Education handles three federal student loan programs:

  1. The Direct Loan Program
  2. The Federal Family Education Loan Program
  3. The Perkins Loan Program

The Department of Education sends all defaulted Direct Loans to the Default Resolution Group and Debt Management and Collections System.

The Debt Management and Collection Systems

The DMCS is the largest collection unit within Federal Student Aid. DMCS handles the official correspondence between the Department of Education, private collection agencies, the Treasury Offset Program, administrative wage garnishment, the credit reporting bureaus (credit report/credit score), and student loan borrowers. As the largest collection agency within FSA, DMCS can be notoriously difficult to get in contact with — especially during tax refund season.

Defaulted FFEL loans may be owned by the Department of Education or by a guaranty agency (ECMC, New York State Higher Education Authority, Trellis, etc.).

Defaulted Perkins loans may be owed by the Department of Education or the school you got the loan at.

In my experience, you want to do two things to find out who has your defaulted loans so you can call them to stop a wage garnishment.

First, check the National Student Loan Data System.

After you login, click on the loan and then scroll to the bottom of the new screen, the current loan holder should be listed.

Second, call the Default Resolution Group/Debt Management and Collections System at 800-621-3115. Make sure to speak with a live operator and ask them to tell you which collection agency has your defaulted loans.

The representative will be able to tell you which loans are with Debt Management and Collections Systems and if any are with a guaranty agency.

Where to Mail Payments for Defaulted Federal Student Loans

Occasionally, I have a client who doesn’t want to provide the debt collection agency with their debit card or checking account information. They’re worried that the collection agency will make unauthorized transactions. While in my experience, the risk of that happening is super low, I understand their desire.

So here’s what I have them do instead:

They mail their payments to the US Department of Education National Payment Center.

US Department of Education
National Payment Center
PO Box 790336
St Louis MO  63179-0336

When you mail in the payment, write 3 things on your check:

  1. Your name
  2. Your Social Security Number
  3. Your account number

To confirm your payment has been properly applied to your loan balance, log into myeddebt.ed.gov.

myeddebt.ed.gov

Next Gen FSA May End Student Loan Collections by Private Agencies

Under Secretary Betsy DeVos, the Department of Education announced the Next Gen Federal Student Aid initiative. The aim of Next Gen FSA is to improve how student loan borrowers and parents interact with Federal Student Aid programs by consolidating multiple federal student loan websites into a “single, digital front door”.

That front door is studentaid.gov.

One other aim of Next Gen is to remove private debt collection agencies from the debt collection process.

The reasons offered for this removal is that private debt collection agencies are expensive and ineffective at debt collection (most borrowers get out of default not by repaying the debt but by using federal tools: loan rehabilitation and consolidation) and collection can be handled by loan servicers under the Next Gen system.

Of course, those collection agencies don’t want to be removed from the process. They make a lot of money handling collections (about $1700 per successful loan rehabilitation).

So in June 2018, they sued to force the Department to let them stay involved.

They lost that lawsuit, however. And now, the Department appears free to move forward with its plan to have one entity (Next Gen) oversee the “full life-cycle of a student loan from disbursement to pay-off.”

If you’re curious, you can read more about the student loan debt collection sage here. Also, here’s a helpful timeline of the major landmarks on the path to Next Gen.

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