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What Happens When Your Student Loans Go to Collections?

By Jamie Cattanach · October 13, 2021 · 7 minute read

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What Happens When Your Student Loans Go to Collections?

When a borrower stops making payments on student loans for a period of time, they could end up in default. And in some cases, lenders may send loans that are in default onto collections.

In general, it’s ideal to avoid defaulting on student loans and having them sent to collections in the first place. But 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.

How Student Loans End up in Collections

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 $1.7 trillion in student loan debt as of the second quarter of 2021. When you consider that the average student loan debt for the class of 2020 was over $29,900, it’s no surprise that some have trouble keeping up with it. In fact, an average of 15% of student loans are in default at any given time.

Delinquent Federal Student Loans

The first day after missing a payment on a federal student loan, the loan becomes delinquent. The loan will remain delinquent until the overdue balance is paid, or the borrower makes alternate arrangements such as applying for deferment or forbearance or switching their payment plan.

After 90 days of missing payments for federal student loans, the loan servicer will report the late payments to credit bureaus, which could negatively impact the borrower’s credit score.

Recommended: Defaulting on Student Loans: What You Should Know

Federal Student Loans in Default

For federal loans, you typically go into default after you haven’t paid your loan bill for nine months or 270 days.

When in default, the entire balance of the loan comes due. But just because a loan is in default, doesn’t mean it automatically goes to a collections agency.

At this point, you may have the opportunity to make arrangements with your loan servicer. 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.

Private Student Loans in Default

The timeframe may vary for private loans depending on the terms and conditions of the loan. Generally speaking, private student loans may go into default after 90 days ​of missed payments.

What Does It Mean to Have a Loan Sent to Collection?

Once your debt is sent to a collections agency, that agency 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. For federal student loans, lenders are not required to take the borrower to court before garnishing wages.

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.

Private student loans function differently. They are not subject to the same special regulation as federal student loans. Private lenders interested in garnishing wages must follow garnishment rules laid out for private debt. In this case, the lender is required to take the borrower to court and obtain a judgment in their favor before any wages can be garnished.

Recommended: What Happens If You Just Stop Paying Your Student Loans

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, if you have defaulted on federal student loans, 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. For both private and federal student loans in default, the lender or the collections agency will report the late payments 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.

Recommended: Student Loan Deferment vs Forbearance: What’s The Difference?

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.

Options for Federal Student Loans

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 new 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%).

Options for Private Student Loans

When it comes to private student loans, private lenders may or may not offer borrowers the opportunity to rehabilitate their loans. And, when it comes to private student loan rehabilitation there is not much federal legislation. Borrowers who have rehabilitated a private student loan may ask to have the default removed from their credit report, but there is no guarantee that it will be removed.

In some circumstances, the statute of limitations on debt may be a consideration for private student loan debt. This is a legal time frame in which a creditor is allowed to collect on the debt and it is determined by state law. In the case that the statute of limitations on private student loan debt has been met, entering into a rehabilitation plan may restart the limitations period.

Additionally, it’s important to note that some lenders may charge off private student loans that are delinquent for 120 days, or a set period of time, which may vary from lender to lender. If a debt is charged off, the lender may not be willing to work with the borrower.

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.

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The Takeaway

In an ideal world, the best way to avoid going into student loan default in the first place is to make payments on time and in full — or, better yet not to take out student loans in the first place.

However, that’s not the world we live in. The cost of education is so high that many students who pursue a college degree will need a little bit of financial help along the way. Unfortunately, it’s easy to get in over your head with student loans.

If you’re reading this article about 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 make ends easier to meet in the short term and keep you from worrying about imminent default.

Note that refinancing federal student loans eliminates them from federal borrower protections such as income-driven repayment plans or student loan deferment.

SoFi also offers a line of student loan and student loan refinancing programs, which could be an option. For those struggling with their income, it may be worth considering adding 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.)

Learn more about whether SoFi student loan refinancing could be right for you.


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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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