Collection Agencies of Student Loans

If you default on your student loans, the lender or guarantor may use a collection agency to collect the loan, which is stated in federal regulations. The collection agency’s costs are added to the amount due, and the borrower is required to repay them in addition to the amount due on the loan.

Federal regulations concerning campus-based loan programs, such as the Perkins Loan, suggest that collection costs may not reasonably exceed a certain percentage of the principal, interest and late charges collected on the loan, plus any court costs, for collection efforts.

For loans held by the US Department of Education (e.g., Federal Direct Stafford Loans), the department assesses collection costs at a rate of 25% of the outstanding principal and interest due on the loan (or 20% of the payment).

If you work out a payment schedule within 60 days of default, some collection agencies will waive or reduce the collection fee.

Overall, it appears that collection costs can legally be as high as 40%, perhaps even higher.

If you think the collection costs are excessive, you can ask the collection agency to provide a detailed itemization of the actual costs incurred in collecting the loan.

Be aware of the legal and illegal debt collection practices and your rights under the law. In particular, you may be able to stop the phone calls and letters by writing a letter to the collection agency and telling them to stop contacting you. Note that you are still obligated to repay the debt even if the collection agency stops contacting you about it.

Wage Garnishment

The federal government and guarantee agencies can garnish your wages administratively. This is in contrast with lenders of private student loans, who must obtain a court order to garnish your wages.

If a guarantee agency or the US Department of Education will be garnishing your wages, they are required to provide you with 30 days’ notice and to offer you the opportunity for a hearing.

Borrowers should always demand proof of the existence of the debt and the amount of the debt, such as a copy of the original promissory note. Guarantee agencies often have very sloppy records and may not be able to prove the existence of the debt. Borrowers should also ask for and review a complete copy of the repayment history on the loan, as there may be errors where payments were not properly credited to the account or where payments are missing.

The Higher Education Act does not permit wage garnishment of borrowers who have been laid off or fired from their jobs until they have been employed for at least 12 continuous months.

Low-income borrowers should also verify the accuracy of the wage garnishment amount. Most guarantee agencies set the wage garnishment amount at 15% of disposable pay, but the regulations and statute require that the borrower be left with weekly earnings after the garnishment of at least 30 times the Federal minimum wage.

If you have defaulted on your federal education loans, the federal government or a state guarantee agency may intercept your federal and state income tax refunds (or other payments from the federal government) and offset them to satisfy the debt.

Defaulting on Private Student Loans

While federal education loans define a default as occurring after 270 days of non-payment, for private student loans a loan is considered in default after 120 days of non-payment.

Private student loans also have fewer tools for averting default. For example, the forbearance period on a private student loan is usually no more than a year, in six month increments.

Private student loans cannot attach federal and state income tax refunds or prevent the renewal of state licenses, but they can sue under state loan to garnishee wages to repay a defaulted debt.

They are also exempted from discharge by bankruptcy unless the borrower files an undue hardship petition that is granted by the court.

Federal Guide to Defaulted Student Loans

The US Department of Education Debt Collection Service publishes a guide called Guide to Defaulted Student Loans to help students repay their defaulted student loans.

Other helpful web sites include:

• National Student Loan Data System (NSLDS)
• FSA Ombudsman
• Closed Schools Student Loan Discharges