How to Get Student Loans Out of Collections: Federal and Private

If you stop making payments on your student loans, they could fall into default and even get sold to a debt collector. Having student loans in collections can cause a heap of bad consequences, so it’s crucial to learn how to get your student loans out of collections and back into good standing.

Here’s the rundown on how to get student loans out of collections, and stay out.

Student loans in collections: How they get there

If your student loans end up in collections, it’s because you’ve entered student loan default. Federal student loans go into default if you haven’t made payments on your loans for 270 days. Rules for private student loans vary, but they can go into default even sooner, sometimes after a single missed payment.

Once this happens, the balance of your loan is due immediately, which is commonly known as “acceleration.”

What happens once you’re student loans are in collections

If your student loan is in collections, there are a ton of potential consequences — and several of them can cause real financial pain.

If your account goes to collections, you’ll be assessed collection fees in addition to the student loans you owe. These fees vary depending on who holds your loans, but they can be anywhere from about 18% to 40% of your outstanding balance. Just to put that in perspective, adding an extra 40% to a student loan balance of $30,000 would mean your new balance is $42,000.

And if these fees aren’t bad enough, it doesn’t end there. As long as your loans remain in default, the following can also happen:

  • Wages can be garnished and income tax refunds can be taken to repay debt.
  • You can become ineligible for federal financial aid.
  • You can become ineligible for a deferment on loans.
  • You can lose subsidized interest benefits.
  • Defaulted loans will appear on your credit report for up to seven years, negatively affecting your credit score and your ability to get other types of loans.

Student loan collection agencies will attempt to collect this debt from you. As you’ve probably heard, debt collectors sometimes use aggressive tactics to get you to pay the money you owe. If you’re being contacted regularly, make sure you understand your legal rights under the Fair Debt Collection Practices Act.

Knowing these laws can affect not only how much you owe, but also how and when debt collectors can contact you to recover what you owe. There’s a lengthy list of what student loan collection agencies aren’t allowed to do to get you to pay.

Student loans in collections: Here’s what debt collectors are barred from doing…
● Harassment, like threatening you or using obscene language
● Lying to you or tell you you’ll be arrested if you don’t pay
● Hounding you at inconvenient times, such as early in the morning or late at night
● Calling your place of employment if they’ve been told in writing or over the phone not to call you at work
● Contacting your employer
● Sharing your debt information publicly
The debt collection agency also must send you a written debt validation letter telling you how much you owe, who you owe it to and how to dispute the charges if necessary. You can find the full list of practices prohibited by the Fair Debt Collection Practices Act on the FTC website. If you feel that a debt collection company has violated your rights, you can file a complaint with the Consumer Financial Protection Bureau.

Hopefully, these alarming consequences have convinced you to do all you can to stay out of default. But what if you’re already dealing with student loan collections? You probably want to get out.

How to get federal student loans out of collections

If you’re in collections, you’ll need to take action to get out. Ignoring the problem won’t make it go away.

One simple way if you’ve just landed in default is to get caught up on payments quickly. If you make a qualifying payment on a federal student loan that will result in your being less than 270 days delinquent, you may be able to remove the default and collections status immediately. If not, you still have four other options for reviving federal student loans:

1. Rehabilitation means agreeing to a payment plan with the Department of Education. Once you’ve made the required number of payments on time, your loan may become rehabilitated.

2. Student loan consolidation can help by combining the balances of several loans into one, and this can include loans in default. However, the Department of Education says you’ll typically be “required to make at least three consecutive, voluntary and on-time payments prior to consolidation.”

Collections agencies for federal student loans
● Action Financial Services
● Bass & Associates
● Central Research
● Coast Professional Inc.
● Credit Adjustments Inc.
● FH Cann & Associates
● Immediate Credit Recovery Inc.
● National Credit Services
● National Recoveries, Inc.
● Professional Bureau of Collections of Maryland
● Reliant Capital Solutions

3. Discharging student loans with bankruptcy may be an option, too. While it may be difficult to have your loans discharged in bankruptcy, it’s not impossible if you meet the right conditions.

4. Full repayment: You could just repay the entire amount of the loan. However, given the size of most loans, this probably isn’t a feasible option.

How to find your federal student loan debt collector
Either contact your loan servicer or contact the Education Department’s Default Resolution Group.

How to get private student loans out of collections

Private student loans unfortunately don’t qualify for the federal loan-specific programs above.

If you have private loans in default, it’s important to take action right away to get your debt out of collections. If your account has already been sent to a debt collection agency, here are five steps you can take to get back on track:

1. Dispute the debt
2. Settle your debt
3. Pay the amount owed
4. Consolidate or rehabilitate your loans
5. Declare bankruptcy

1. Dispute the debt

First, ensure that the information the debt collection agency has is accurate — you might not owe money at all. Your loan servicer might have reported your account as in default by mistake, or someone could have taken out a loan in your name.

Review your credit report for accounts opened in your name, including student loans. Make sure the dates and amounts listed are accurate. If there are any issues, or if you notice a loan on your report that you didn’t take out, you’ll need to open a dispute with both the loan servicer and the three major credit reporting agencies.

2. Settle your debt

If you defaulted on private loans, you might be able to get your loans out of debt collections by settling the debt.

Under this approach, you negotiate with the debt collections company to pay off less than what you owe. For example, if you owed $20,000 in student loans, you might be able to pay just $15,000.

However, getting a settlement can be difficult. If the agency agrees to your terms, you’ll likely have to pay the amount you owe in one lump sum, so you’ll need a good amount of cash handy. It’s also important to make sure any agreement you make is in writing — even better if you can have a certified student loan counselor or lawyer review the contract.

3. Pay the amount owed

Although it might sound impossible, paying off debt in collections is the quickest way to resolve your loans.

If you’re able, consider asking friends or family for help paying your outstanding balance. Or, you can take on an extra job or side hustle to increase your income. Those options might not be ideal, but having debt in collections can damage your credit and have long-term consequences. Getting out of student loan collections as quickly as possible will get you back on your feet much faster.

4. Consolidate or rehabilitate your loans

Another way to resolve debt in collections is by consolidating your loans.

Note that only federal student loans are eligible for consolidation and rehabilitation (as detailed above). Private student loans are eligible for consolidation through refinancing with a private lender, but you’ll probably have a tough time qualifying if you’re in student loan collections.

You could try speaking with a lender about your options, and find out if adding a cosigner to your refinancing application could help.

5. Declare bankruptcy

If you’re being hounded by debt collectors but are unable to resolve your debt by other means, bankruptcy could be an option. Student loans are difficult to get rid of in bankruptcy, but it’s not impossible.

To qualify, you’ll need to demonstrate to the court significant hardship, such as a medical issue that prevents you from working. You’ll also have to prove that it would be impossible for you to repay the loans while maintaining a basic standard of living.

Declaring bankruptcy is a huge decision that can impact your life for years, so make sure you’ve exhausted all of your other options before exploring it.

Your alternative option is waiting until the statute of limitations on your debt runs out – but the debt collector could sue you in the meantime.

How to avoid having student loans in collections

Once your loan is out of default, be careful not to end up in the same spot again. Hopefully, you’re now on a manageable payment plan that lets you repay without missing payments and falling behind again — but it’s possible that could change. The key is to be proactive and get help if you do run into problems, before you end up in collections again.

To start, make sure your payment plan is the right option for you. There are various student loan repayment plans (for federal loans) that can bring the monthly payment amount down based on a variety of factors. Just keep in mind that many of these payment plans could increase the total amount you’ll have to repay.

And for federal and private loans, look into loan repayment assistance programs that could deliver meaningful benefits, depending on your career and home state.

If you can’t pay or otherwise need to pause payments, see if either student loan deferment or forbearance is an option for you. Deferment means you can temporarily stop making payments on your loans, and interest doesn’t accrue on federal direct subsidized loans during that time. You’ll typically be eligible if you’re enrolled in college at least half time or in other cases like unemployment or military service.

Forbearance isn’t as advantageous as deferment, as you’ll have to pay interest on all loans (federal and private loans), but it will keep you out of default. With forbearance, you may be able to stop making monthly payments for up to 12 months due to financial hardship, illness or other reasons. Confirm details and eligibility with your federal loan servicer or private lender.

Bottom line: Always take action to find potential alternatives to ending up in default. You’ll be glad you did.

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