If you are in student loan collections, you probably ended up there because you failed to make payments on your loan. Student loan collections can be frustrating and stressful, but there are ways to get out and stay out. These include student loan consolidation, rehabilitation, or quickly catching up on payments.
How Do I Get Out of Collections?
Consolidate Your Student Loans
Consolidating your federal student loans is the quickest and easiest way to get out of default and stop calls from student loan collection agencies. Consolidation lumps all of your federal loan loans–including defaulted federal loans–into one larger loan. Your loans are out of default the moment you consolidate them and you get a fresh start. This is a federal program designed to give people a second chance. It costs nothing to consolidate your federal student loans and takes typically 1-3 months from start to finish depending on how you apply (paper -vs- online).
A federal consolidation is a great option, but it is not an option for you if:
- You already have a Direct Consolidated Loan and/or
- You are in an active wage garnishment
If you are unable to consolidate your loans for either of those reasons, you should look into student loan rehabilitation.
Contact Your Lender
Maintaining open communication with your lender or any student loans collections agencies will help make this process easier. You need to figure out your student loan balance and your servicer. You will need your FSA ID to login to the federal database. Once logged in, you can locate information about your federal student loan history and current loan holder. Contact your loan holder to ask about your options or to find out the contact information for their collections agency.
Catch Up On Payments
Quickly catching up on payments can help move your newly defaulted loans out of default status. This only works for loans that recently went into default status. Making the payments quickly will stop collections and help you get back to your regular payment plan.
If you were struggling to make payments under your old repayment plan, consider switching to a different federal student loan repayment plan.
Rehabilitate Your Student Loans
Student loan rehabilitation involves setting up a payment plan with the Department of Education. The goal is to come up with a mutually agreed upon plan that is affordable for the borrower. After making nine on-time voluntary monthly payments within a 10-month period, you can rehabilitate your loan. This would take it out of default status and stop the collections calls.
Under your loan rehabilitation payment plan, your payment could be as little as five dollars per month. However, you may need to spend more than that on your loan each month. Involuntary payments collected through wage garnishment or tax offset may continue during your 10-month rehabilitation period. If this happens, they will stop being collected after you make some of your voluntary payments or after your loan is fully rehabilitated.
Generally, you should only resort to student loan rehabilitation if federal student loan consolidation is not an option. Rehabilitation is also only a one-time deal. You cannot rehabilitate a previously defaulted loan a second time.
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How Did My Student Loans End Up in Collections?
Student loans end up in collections after you default on them. All loans in collections are in default, but not all loans in default are in collections. This means that you can get yourself out of default before your loans get sent to collections.
Your student loans most likely ended up in default because you did not make payments for a long period of time–typically 270-360 days. However, some loans enter default after just one or two missed payments. Once you are in default status, your entire loan balance may be accelerated and all due at once. There is no more monthly payment plan or loan term, although you can negotiate terms with the collections agency.
Your defaulted loans enter student loans collections after you fail to make this lump sum payment or make an arrangement with your lender.
What Happens Now that I am in Collections?
Default status and collections present a significant financial hardship. Understanding the consequences of student loan collections can help motivate you to get yourself out and get your finances under control. Plus, understanding how collections work will help prevent any surprises down the road.
You Now Owe Collections Fees
Even if you have money to pay off your outstanding balance, you probably do not have enough to cover the fees that student loan collections agencies tack on. The fees help cover the trouble that these agencies go through to receive payment.
Collection fees vary greatly depending on your loan holder. Typically, they fall anywhere from 18% to 40% of your remaining student loan balance. If you owe $50,000 in student loans and have an 18% collections fee to deal with, you will need an extra $9,000 for the collections fees alone.
Your Wages May Be Garnished
When you fail to pay your federal or private student loans, a judge may rule that your lender or collections agency can take money directly from your paycheck. This is called wage garnishment. For federal loans, a lender can take up to 15% of your wages. For private loans, they can take up to 25%.
Your Federal Tax Return May Be Withheld
Along with garnishing your wages, the federal government can seize your federal (and sometimes state) tax returns. The Department of Treasury simply withholds your partial or full refund to help settle your federal student loan debt. If you file married jointly, the IRS will also withhold your spouse’s refund.
If your federal loans are currently in collections, you will most likely have your tax refund withheld. The IRS must notify you of the tax offset and give you time to review your records. You will also have the chance to challenge the tax offset. You can earn more about avoiding a tax offset here.
You Lose Eligibility for Federal Financial Aid
If your loans are in collections (or just in default), you can no longer apply for or receive federal financial aid. This can make it difficult to return to school after time off or to pursue a higher degree. You can become eligible again for financial aid after making six on-time monthly payments.
You Lose Eligibility for Forgiveness Plans
Defaulted loans, and thus those in student loan collections, are ineligible for federal student loan forgiveness programs. That is why it is best to switch to an income-driven repayment plan prior to defaulting on your loans. This will help make payments more manageable and prevent you from falling behind. You could owe as little as $0 per month.
You Can No Longer Defer Your Loans
A deferment allows borrowers to temporarily stop or reduce their monthly payments for a specified amount of time. You are still responsible for paying accrued interest during a period of deferment, but only on unsubsidized loans, FFEL PLUS loans, and Direct PLUS loans. When your loans are in collections and/or default status, you can no longer defer them. That is why it is best to apply for deferment as soon as you realize you will have trouble making your monthly loan payments.
You May Lose Subsidized Interest Benefits
The government does not just pay interest on subsidized loans while you attend school. It also pays or forgives loan interest for deferred unsubsidized loans and unsubsidized loans enrolled in certain repayment plans. When you default on your loans, you can be denied for these benefits.
Your Credit Score Drops
Defaulted loans and those in collections appear in your credit report and drop your score. This can result in some unfortunate consequences. It can make getting approved for a car lease, car loan, personal loan, or mortgage difficult and increase the interest rates on the loans you do get approved for. You may even have trouble securing a phone plan, utilities, or an apartment. This negative mark on your credit history can also affect your ability to find a new job, especially if you work in the financial industry.
Although you can do a lot to remedy your credit score, late payments and student loan defaults will remain in your credit history for seven years.
Your Careers Options Are Affected
Depending on your situation, a defaulted student loan could severely impact your future career path. You could be denied from enlisting in the Armed Forces or pursuing work at a federal agency. Many states, county, and city governments also will not hire individuals with defaulted student loans. Defaulted student loans can even prevent government contractors from obtaining the necessary security clearances to do their job.
Defaulted student loans can even make it impossible for you to renew a professional license that you hold. In some cases, your license may be revoked entirely. This can significantly affect your income, happiness, and career plans.
Staying Out of Collections
After you get out of default and student loan collections, you need to make a plan that will help you avoid the situation again. Luckily, there are things you can do to avoid default and collections even if your finances start to crumble.
Choose the Right Repayment Plan
The federal government offers several repayment plans for federal student loans. You cannot change the repayment plan of defaulted loans, but you can switch plans once your loans are out of default. Switching to a new repayment plan will help make your monthly payments more manageable and make it easier to avoid defaulting again. Plus, you can have your loans forgiven after a set number of years.
The federal government offers six different repayment plans, but here are three to make note of:
Income-Based Repayment (IBR): Your monthly payment is based solely on your income and family size. Your outstanding loan balance is not taken into account. Instead, borrowers just pay 15% of their discretionary income toward their federal student loans. For some, this means paying as little as $0 per month.
Pay As You Earn (PAYE): PAYE is similar to IBR, but it only uses 10% of your discretionary income to calculate your monthly payment. Borrowers usually end up paying less with the PAYE program, but it is more difficult to qualify for. Payments can run as low as $0 per month.
Revised Pay As You Earn (REPAYE): The REPAYE program also uses 10% of your discretionary income to calculate your monthly payment. Unlike, the PAYE program, the REPAYE program counts both your income and your spouse’s income even if you file separately. This plan comes with the best interest loan forgiveness benefits.
Use our student loan payment calculator to determine which plans you qualify for and to compare your payment plan for each one.
Consider Deferment or Forbearance
If you cannot afford to make any type of payment, you can apply for deferment or forbearance. Both allow you to temporarily stop payments for a set amount of time, but deferment is more advantageous.
During deferment, the interest on your subsidized loans will not accrue. This helps to keep your overall loan balance down. You can defer your loans if you are enrolled at least half-time in college, unemployed, or in the military.
During forbearance, the interest on all of your loans accrues. Although this is not ideal, it is much better than falling into default and facing student loan collections. Financial hardship, illness, or related reasons may make you eligible for forbearance. In general, you can apply to stop your loan payments for up to 12 months at a time.
The Differences between Federal Student Loan Collections and Private Student Loan Collections
Private student loan default and collections are very similar to the federal student loan collections process outlined above. However, there are some important differences worth noting.
- Loans Enter Default and Collections Sooner
While federal loans take 270 days of non-payment to go into default, private student loans take just 120 days. This means you can enter collections sooner and have less time to prepare.
- Private Lenders Cannot Take Your Tax Return
Your bank, credit union, loan agency, or collections agency cannot offset your tax return to cover your remaining loan balance. However, your lender can seek court approval to collect funds from your bank account through non-wage garnishment. If you undergo non-wage garnishment, your lender can seize the money in your bank account, which may include your tax return and other savings.
- You Cannot Federally Consolidate Private Student Loans
Federal consolidation is only for federal student loans. Refinancing is a similar process that will also help you to get out of default and collections. With refinancing, you secure a new loan to pay off your old loans. It is hard to refinance with a default on your credit score, so you may need a cosigner to help you out.
- You Can Settle Your Private Student Loan Debt
If your private student loans are in collections, you can quickly resolve the situation by settling. To settle, you will need to negotiate a lump sum payment with your debtor. This saves you the hassle of going to court and offers the chance of getting out of default without paying off your total loan balance.
- Wage Garnishment Maxes out at 25%, not 15%
When the federal government garnishes your wages to cover federal student loans, they cap it off at 15% of your disposable income. When private student loan collections agencies garnish your wages, they take up to 25% of your disposable income. This is significantly more money.
- You Have Fewer Options
When it comes to private student loan collections and default, you have fewer options. There are not six different repayment plans to choose from if you are struggling to make payments. A private student loan forbearance period is also usually only in six-month increments and for no more than a year total.
You can and should talk to your lender about student loan repayment assistance, but it is not guaranteed. Your options depend entirely on the stipulations of your loan agreement.