The phrase “student loan collections” may conjure images of a couple of goons with baseball bats knocking on your door. In reality, it probably means being bombarded with letters and phone calls as the collection agency tries to recoup your debt.
You’ll probably want to avoid defaulting on your loans and having them sent to collections. If your student loans have already gone to collections, fear not—there are steps you can take.
Before we dive in, it’s important for you to know that this is an incredibly complex topic. We’re going to try to break it down the best we can, but full disclosure: this info is general in nature and does not take into account your specific objectives, financial situation, and needs; it should not be considered advice. SoFi’s just trying to be real with you and recommend that you speak to a professional about your unique situation.
What Does Defaulting on Your Loans Mean?
Student loans don’t go away until you’ve paid them off. If you haven’t been paying off your student loans, your debt can go into default, because you are failing to fulfill your contractual obligation to repay your loan.
Americans owe more than $1.5 trillion in student loan debt as of the first quarter of 2018. When you consider that the average student loan debt for the class of 2018 was $29,800 , it’s no surprise that some have trouble keeping up with it. In fact, the average cohort default rate hovers around 11% .
For federal loans, you typically go into default after you haven’t paid your loan bill for nine months. The timeframe may vary for private loans depending on the terms and conditions of the loan.
Once you default, the entire balance of your loan comes due. But just because you default, it doesn’t mean your debt automatically goes to a collections agency.
At this point, you will likely have the opportunity to make arrangements with your lender to pay off the debt. For example, your lender may help you tailor solutions that lower your monthly bill to make payments more manageable for you.
However, if you don’t come to an agreement, your lender can send your debt to a collections agency that will collect it for them.
What Does It Mean to Have a Loan Sent to Collection?
Once your debt is sent to a collections agency, they will do everything they can to get you to pay. Unfortunately, on top of collecting the debt, collections agencies typically charge fees , for which you’ll also be responsible.
Once your debt is in collections, the collections agency might try to work out a repayment plan with you as a first step. If you continue to not pay, the agency can then take actions to recoup the money, such as trying to garnish your wages .
Garnishment means the agency can take a certain amount from each paycheck and apply it toward your debt.
Once this happens, you no longer have control over that money. Whereas, if you’d come to an agreement earlier, you may have been able to make smaller payments each month.
What Happens When Your Loans Go into Default and Collections?
Some other not-so-great things can happen when your loans go into default and collections. First, you may lose access to various federal loan repayment plans and forbearance or deferment on federal loans. These programs are important tools designed to make it easier for you to pay off your loans. Loan forgiveness is offered to those who follow career paths in certain government, healthcare, and nonprofit sectors. Forbearance allows you to temporarily stop making student loan payments or reduce the amount you pay each month.
Your credit score may take a hit as well. Once you default, your lender or the collections agency will report you to the three major credit bureaus, who might then lower your credit score.
A low credit score might cost you down the line, making it difficult to secure future loans at reasonable interest rates, should you want to buy a house or a car, for example. It may even mean you won’t qualify for a loan at all. Avoiding default might help you maintain these important financial tools.
How to Get Your Loans Out of Default
Of course, the best thing you can do to avoid default and collections is to pay your bills on time. But if you’ve defaulted, there may still be options for you to recover.
If you have federal student loans, you could try to rehabilitate your student loan in collections. Here’s how the program works—after you have made three consecutive on-time, voluntary, full payments on a defaulted loan, you can consolidate your federal loans .
The new direct loan pays off the old loans in full and consolidates them. Once you have made nine out of 10 consecutive, voluntary, on-time payments to this loan, the loan may be rehabilitated and the default may be removed from your record. With a Direct Consolidation Loan , your eligible federal loans will be combined into one loan with a fixed interest rate—and the new rate will be the weighted average of the rates on the loans being consolidated (rounded up to the nearest one-eighth of 1%).
What to Do If Your Student Loan Goes to Collections
If you do find yourself in the unfortunate situation of having debt in collections, there might be steps you can take.
First, you could talk to your collections agency. It might seem scary, and it may be tempting to ignore their calls and letters, but doing so isn’t going to make them stop. Remember—collections agencies want you to pay—it’s in their best interest for you to ultimately pay back your loan. In many ways, this is a situation in which the ball is in your court.
When you talk to them, the collections agency might offer options tailored to your individual circumstances, such as whether you have a job and what your income is.
They might offer solutions such as allowing you to pay a discounted lump sum, or they might set up a low monthly payment plan if you don’t have a lot of income.
Having your loans in default or collections might have serious effects on your credit and your financial stability. If you’re afraid of defaulting on your loans, or if you already have, consider taking action as fast as you can. Taking control of the situation could help keep it from getting worse.
If you’re concerned about your loans going into default or collections, you’re probably struggling to make your monthly payments. And that’s pretty scary. There are ways to make your monthly payments lower, such that you’re more confidently able to make them. If you have federal loans, looking into federal income-driven repayment plans may be a good idea.
If you have private and federal loans, you could also potentially consider refinancing your loans with a longer term. When you refinance your loans with a longer loan term, it will potentially cost you more in interest over the life of the loan. However, the (hopefully) lower monthly payments could help you manage the payments so you’re no longer worried about imminent default.
Learn more about SoFi student loan refinancing, and whether it’s something you could qualify for. For those struggling with their income, it may be best to consider a cosigner with solid credit history and income, to possibly give you a better chance at approval. (Just keep in mind, that a cosigner would be just as responsible for your monthly payments as you are.)
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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.