Last Updated on March 13, 2023
Paying back student loans can be challenging, and if you don’t keep up with your payments, your loans could end up in default. If that happens, your lender may send your student loans to collections.
If you have student loans in collections, the consequences can be severe, including damage to your credit, wage garnishment, and costly collection fees. However, there are ways to get out of default and end the collections calls, and you don’t have to empty your bank account to do it.
What Happens When Your Student Loans Are In Collections
If you have a student loan in collections, you’ve defaulted on your loans. What happens next depends on the type of loans you have: federal or private.
Collections and Federal Student Loans
Previously, the federal government contracted with federal debt collection agencies to handle loans that were in default. However, the U.S. Department of Education announced in November 2021 that it was ending all contracts with private collection agencies, so borrowers will no longer deal with third-party collection companies.
That doesn’t mean there aren’t consequences to missing your payments. Defaulting on federal student loans can lead to serious issues, including:
- Loan acceleration: When you are in default, your loan is accelerated, meaning you immediately owe the entire balance and unpaid interest.
- Treasury offset: If you default on a federal loan, the government can use treasury offset to seize your tax refund or federal benefits, such as your Social Security payments, to repay your loans.
- Wage garnishment: The federal government doesn’t need to get a court order to garnish your wages. When you default on your student loans, the loan servicer can contact your employer and take money from every paycheck to pay off your loans.
- Ineligible for financial aid: As long as your loans are in default, you’re not eligible for future financial aid.
- Default appears on credit report: Your loan servicer will report the default to the major credit bureaus, and it will appear on your credit report. A loan default can significantly damage your credit score, making it difficult — and potentially impossible — to qualify for other loans or credit cards.
Collections and Private Student Loans
Banks and online lenders issue private student loans and work differently from federal student loans.
When you default on a private student loan, your lender may decide to sell your account to a collection agency, and the agency will contact you — repeatedly — to collect the outstanding payments.
If that happens, you can expect the following:
- Costly collection fees: Besides the amount you owe on the original loan, you will also have to pay collection fees to the agency. According to the Collection Bureau of America, you can expect to pay 25% to 50% of the amount collected in fees.
- Lawsuits: If the collection agency cannot collect a payment, it may take you to court. It can garnish your wages if it wins the case and you receive a court order against you. And you may have to reimburse the agency for attorney fees and other legal expenses.
- Damaged credit: Your original lender will report the defaulted loan to the credit bureaus, which can severely damage your credit.
How to Get Student Loans Out of Collections
If your student loans are in collections, you may feel like there’s no way out. But options are available to help you get out of default and end the collection calls.
1. Know Your Rights
The first step is to understand your rights as a borrower. The Fair Debt Collection Practices Act protects consumers from harassment by debt collectors, and it applies to student loans in collections.
Under the laws, debt collectors are not allowed to use obscene or profane language, threaten violence, call you at unreasonable hours, misrepresent your legal rights, disclose your personal information to third parties or deceive you.
If a collections agency violates those rules, contact your state attorney general, the Federal Trade Commission, and the Consumer Financial Protection Bureau.
2. Ask for a Debt Verification
If a collection agency contacts you about a student loan, submit a debt validation request. A debt validation request formally asks the agency to prove that you owe the debt.
The agency will have 30 days to send you documentation, such as a copy of your loan agreement or promissory note, that shows you are responsible for the debt. If it can’t verify the debt with proof, it must stop trying to collect.
3. Explore Debt Consolidation
If you have federal student loans that are in default, one option is to consolidate them with a Direct Consolidation Loan. Once you do, the existing loans are paid, and you’ll have just one loan to manage and one monthly payment to make in the future.
To qualify, you must make three consecutive payments or agree to repay your loans under an income-driven repayment plan.
4. Find Out If Rehabilitation is an Option
Another option for federal student loan borrowers is loan rehabilitation. If you use this method, you contact the collection agency or loan servicer to discuss rehabilitation and a reasonable payment amount.
Once you agree on a payment, you will sign a rehabilitation agreement. Then you must make nine monthly payments on time within ten months. The loans are rehabilitated at the end of the ten months, and you’re no longer in default.
5. Consider Student Loan Refinancing
If you have private student loans, you aren’t eligible for federal loan consolidation or rehabilitation.
You usually have to pay off your loans to get out of default and get your loans out of collections. That doesn’t mean you have to empty out your bank account or retirement fund; you can use student loan refinancing to manage your debt instead.
When you refinance your loans, you take out a new loan for the amount of your outstanding education debt. The new loan pays off the old ones, and, going forward, you have a new loan term and monthly payment.
If your loans are in collections, your credit score may be damaged, making it difficult to qualify for refinancing. However, lenders may be willing to approve you for a loan if you add a cosigner with excellent credit and steady income to your application.
You can check your eligibility online with ELFI and view your loan options without affecting your credit score.*