Student Loan Collections: How They Work and What to Do About Them

Like other types of credit, student loans can be charged off and sent to collections if you stop making payments. This is becoming an increasingly serious issue as student loan debt continues to rise in the US—according to government data, in 2021, 42.9 million Americans owed almost $1.6 trillion in student loans, and 18% of borrowers who were still repaying their student loans in 2020 were behind on their payments. 1 2

If you’re one of the many former students in the US with a student loan that’s been sent to collections, then you should know about what happens when you default on loans, how you can get out of default, and what steps you should take next.

What happens when your student loans go to collections?

Student loans go to collections once you enter student loan default. This generally occurs after 270 days of missed payments for federal student loans, although it can happen sooner for private student loans. 3

Once your student loans go to collections, a few important things can happen, depending on the type of loan you have: 3

• Your entire balance becomes immediately due: If you have a federal student loan, your loan servicer will demand a full repayment of the entire balance of your loan (rather than allowing you to continue paying in installments). This is called acceleration.
• Your loan is placed with debt collectors: Although the US Department of Education no longer works with third-party debt collection agencies to collect federal student loans, private student loan providers often enlist the help of debt collectors. In some cases, your loan servicer may charge off the debt and sell it to a debt buyer.
• Money is taken from you against your will: If you have a federal student loan in default, debt collectors can garnish your wages, seize your tax refunds, or deduct money from your Social Security benefits. 4 Debt collectors for private student loans can also garnish your wages or bank account if they file a lawsuit and obtain a judgment against you.
• You’re charged additional fees: The debt collection agency handling your debt may charge you collection fees. They may even sue you and charge you for court and attorney fees.
• You lose your benefits on federal student loans: If you default on federal loans, you may become ineligible for future federal funding and lose benefits like options for deferment or a new repayment plan.

How long do student loans in collections stay on your credit report?

Most collections can only stay on your credit report for up to 7 years, and this applies to private student loan collections. However, the Fair Credit Reporting Act makes exceptions to the 7-year reporting limit for certain federally insured loans. 5

Specifically, Perkins Loans can stay on your credit report indefinitely as long as they’re unpaid. 6

Student loans will affect your credit score as long as they’re on your credit report, and those that are in collections will do major damage to your payment history, which is the most important factor contributing to your credit score. For this reason, it’s best to act as soon as possible and get help with debt collection to minimize the damage to your credit.

How to get student loans out of collections

Rest assured that in many cases, it’s possible to get your student loans out of collections, even when catching up on all your missed payments is infeasible.

The right approach depends on the type of loans you have (federal or private).

Getting federal student loans out of collections

Getting federal student loans out of collections is relatively straightforward, thanks to the post-default repayment programs available for government loan borrowers.

Student loan rehabilitation

Student loan rehabilitation is a special payment plan offered by the US Department of Education to federal student loan borrowers who are in default. After you complete the program, the record of your defaulted loan will be removed from your credit reports. 7

To successfully rehabilitate your student loan, you’ll need to make nine consecutive monthly payments within 20 days of the due date over the course of 10 months. 7 To make these payments affordable, they’ll be set at no more than 15% of your discretionary income.

Note that loan rehabilitation is a one-time opportunity, and it won’t be possible in the future if you default on your payments again. 7

Student loan consolidation

Federal student loans can be consolidated into a Direct Consolidation Loan. With debt consolidation, all of your loans are merged into a single loan with a fixed interest rate and repayment schedule.

While loan consolidation can make it easier to pay back your debts by reducing the number of payments you have to make, it may not necessarily save you money since your new loan’s interest rate will be the average interest rate across all your loans. With that said, you don’t have to include all of your eligible loans in your Direct Consolidation Loan.

Note that you won’t be eligible for student loan consolidation if you have a wage garnishment order or judgment against you. 8

Getting private student loans out of collections

Private student loans don’t qualify for the same programs that federal student loans do, so you’ll have to choose from the methods used for getting other unsecured loans out of collections.

Potential methods include:

Negotiating a repayment plan

If paying off your student loans once they’ve gone to collections seems infeasible, you may be able to work out a repayment plan with the debt collection agency. This will consist of repaying the debt in manageable installments over time. Try contacting your debt collectors to see what options they’re willing to give you.

Debt settlement

Another way to get your private student loans out of collections is to negotiate a debt settlement, which is where the agency handling your account agrees to clear your debt in exchange for less than the full amount you owe.

The good news is that debt settlement is much easier to do with private student loans than federal student loans. However, you may need to pay the agreed amount in one lump sum, which can be difficult, and the settled debt will still damage your credit (whereas paying off collections completely can improve your credit score in some cases).

Bankruptcy

If there’s no hope that you’ll ever repay your debts and you’re experiencing financial hardship, then you could file for bankruptcy.

This is a big decision because it’s the most damaging thing that can happen to your credit, and some bankruptcies can stay on your credit report for up to 10 years. 9 Also, student loans can be harder to discharge in bankruptcy than other types of debts (although private student loans are easier to have discharged than federal loans).

What to do if a student loan in collections is falsely reported on your credit report

Sometimes, debt collection agencies (or the credit bureaus that compile your credit report) make mistakes. If there’s a student loan-related collection account on your credit report that you don’t recognize, it’s possible that it’s a reporting error.

Reporting errors can appear in situations like the following:

• A credit bureau or collection agency confuses you with someone else
• Your original creditor loses track of one of your payments and mistakenly believes you defaulted on your loan

If you have an erroneous collection account on your credit report, begin the credit dispute process to get it removed.

How to dispute a student loan in collections

Your first step should be to get copies of your credit reports from all three credit bureaus (Experian, TransUnion, and Equifax), which you can do for free at AnnualCreditReport.com. Carefully check the details of your collections for mistakes.

If any of the information related to the account is wrong or your account has been sent to collections by mistake (or it’s not yours to begin with), you can dispute the item by sending a credit dispute letter to the credit bureau publishing the error.

The credit bureaus are required to respond to your dispute in 30 days. If they can’t provide evidence that the debt is valid, they’ll be required to remove it from your credit report.

You can also dispute collections directly with your student loan debt collectors by sending them a debt verification letter. They’ll have to stop calling you or trying to collect the debt until they can provide evidence that you owe it.

Can student loans in collections be forgiven?

Yes, federal student loans can be forgiven, canceled, or discharged in certain circumstances. However, private student loans cannot be forgiven.

To get your federal student loans forgiven, you’ll first have to get them out of collections using one of the approaches mentioned above. You’ll also need to meet certain criteria: 10

• Enrollment in an income-based repayment plan: Any balance remaining on your federal student loans will be forgiven in 20 to 25 years if you enroll in an income-based alternative repayment plan, such as Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR), or Income-Contingent Repayment (ICR). However, you may have to pay taxes on the forgiven amount.
• Public service loan forgiveness: If you are employed by a government or not-for-profit organization and apply for public service loan forgiveness, the remaining balance on your loans after 120 monthly payments (10 years) will be forgiven.
• Teacher loan forgiveness: You can apply to have $17,500 forgiven from your Direct Loan or FFEL Program loans if you teach full-time for 5 consecutive years at a low-income elementary school, secondary school, or educational service agency.
• Perkins Loan cancellation: You may be able to have all or some of your Perkins Loans forgiven if you meet the Federal Student Aid’s criteria for Perkins Loan cancellation.
• Disability discharge: If you’re totally and permanently disabled, you may be able to have your federal student loans discharged.

How to avoid defaulting on your student loans in the future

If you rehabilitate your student loans or bring them out of collections, it’s important to take measures to keep them from going back into default, otherwise you’ll end up with the same problem again.

Your options include:

Deferment

Student loan deferment postpones your federal student loan payments for a set period of time, depending on the reason you want to defer your payments. If you’re financially struggling, you can defer your payments for up to 3 years. 12

During this period, your subsidized loans won’t accrue interest. Bear in mind that you’ll only be eligible if you’ve successfully gotten your loans out of default/collections, either through rehabilitation or loan consolidation. 3 You can’t defer student loans that are currently in default.

To apply, fill out an application form for deferment, which you can find on the Department of Education’s website.

Forbearance

If you have cash flow problems, you can apply for forbearance on your federal student loans to have your payments temporarily postponed. If approved, your forbearance will last 12 months, although you can immediately reapply for another 12 months of forbearance, up to a maximum of 3 years. 13

However, your loans will still accrue interest while you’re in forbearance. You’ll also need to have gotten your loans out of collections/default. 3

Can you apply for deferment or forbearance on private student loans?

You may be able to apply for deferment or forbearance on private student loans, but the options you have for postponing payments will depend on your lender. 14 Contact your loan servicer as soon as possible when you want to adjust your loan terms to avoid defaulting.