Student Loan Collections: What It Means and How To Get Out

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Ending up in student loan collections is like the “penalty box” of student loans. To get there, you’ve done something wrong, and now you’ll have to face the consequences.

Typically, you have ended up in student loan collections because you haven’t made payments on your student loans for an extended period. If you thought that the only consequences were calls and letters from your loan servicer, I’m sorry to say that the penalties can be much worse.

That said, ending up in student loan collections isn’t the end of the world. You can still get out, but you’ll need to take action and once you’re out, there are steps you can take to stay out.

Here’s the rundown on how to get out—and stay out—of collections.

How your student loans end up in collections

If your student loans end up in collection, it’s because you’ve defaulted on them. If the distinction is confusing, just remember: All loans in collections are in default, but loans in default aren’t necessarily in collections.

Student loans go into default if you haven’t made payments on your loans for 270 to 360 days. Once this happens, the balance of your loan is due immediately. This is commonly known as “acceleration.”

What happens once you’re in collections

If your loan is in default, which includes collections, there are a ton of potential consequences. And several of them can cause real financial pain.

If your account goes to collections, you’ll be assessed collection fees in addition to the student loans you owe. These fees vary depending on who holds your loans, but they can be anywhere from 18% to 40% of your outstanding balance. Just to put that in perspective, adding an extra 40% to a student loan balance of $30,000 would mean your new balance is $42,000.

If these fees aren’t bad enough, it doesn’t end there. As long as your loans remain in default, FinAid says the following can also happen:

  • Wages can be garnished and income tax refunds can be taken to repay debt.
  • You can become ineligible for federal financial aid (which continues until you’ve made 6 on-time monthly payments).
  • You can become ineligible for a deferment on loans.
  • You can lose subsidized interest benefits.
  • Defaulted loans will appear on your credit report for up to 7 years, negatively affecting your credit score and your ability to get other types of loans.

Student loan collection agencies will attempt to collect this debt from you. As you’ve probably heard, these debt collectors sometimes use aggressive tactics to get you to pay the money you owe. If you’re being contacted regularly, make sure you understand your legal rights under the Fair Debt Collection Practices Act.

Knowing these laws can affect not only how much you owe but also how and when debt collectors can contact you to recover what you owe. There’s a lengthy list of what student loan collection agencies cannot do to get you to pay. It includes harassment, like threatening you or using obscene language. They also can’t lie to you or tell you you’ll be arrested if you don’t pay.

You can find the full list of practices prohibited by the Fair Debt Collection Practices Act on the FTC website.

Hopefully, that’s enough to scare you into doing all you can to stay out of default. But what if you’re already dealing with student loan collections? You probably want to get out.

How to get out of collections

If you’re in collections, you’ll need to take action to get out. Ignoring the problem won’t make it go away.

One simple way if you’ve just landed in default is to get caught up on payments quickly. If you make a qualifying payment that will result in your being less than 270 days delinquent, you may be able to remove the default and collections status immediately. If not, you still have other options.

Rehabilitation means agreeing to a payment plan with the Department of Education. Once you’ve made the required number of payments on time, your loan may become rehabilitated.

Student loan consolidation can help by combining the balances of several loans into one. This can include loans in default. However, the Department of Education says you’ll typically be “required to make at least 3 consecutive, voluntary, and on-time payments prior to consolidation.”

Discharging student loans with bankruptcy may be an option, too. While it may be difficult to have your loans discharged in bankruptcy, it’s not impossible if you meet the right conditions.

Finally, you could just repay the entire amount of the loan. However, given the size of most loans, this probably isn’t a feasible option.

Once you’re out, how to avoid going back to collections

Once your loan is out of default, be careful not to end up in the same spot again. Hopefully, you’re now on a manageable payment plan that lets you repay without missing payments and falling behind again. But it’s possible that could change. The key is to be proactive and get help if you do run into problems—before you end up joining collections again.

To start, make sure your payment plan is the right option for you. There are various student loan repayment plans that can bring the monthly payment amount down based on a variety of factors. Just keep in mind that many of these payment plans will increase the total amount you’ll have to repay.

If you can’t pay, see if either student loan deferment or forbearance is an option for you. Deferment means you can temporarily stop making payments on your loans, and interest doesn’t accrue on subsidized loans during that time. You’ll typically be eligible if you’re enrolled in college at least half time or in other cases like unemployment or military service.

Forbearance isn’t as advantageous as deferment, as you’ll have to pay interest on all loans, but it will keep you out of default. With forbearance, you may be able to stop making monthly payments for up to 12 months due to financial hardship, illness, or other reasons. For additional information, see our post on student loan deferment and forbearance.

The key: Always take action to find potential alternatives to ending up in default. You’ll be glad you did.

Andrew Pentis contributed to this report.

 

Interested in refinancing student loans?

Here are the top 6 lenders of 2020!
LenderVariable APREligible Degrees 
1.99% – 5.64%1Undergrad
& Graduate

Visit Earnest

1.89% – 5.90%2Undergrad
& Graduate

Visit Laurel Road

2.25% – 6.09%3Undergrad
& Graduate

Visit SoFi

1.89% – 6.77%4Undergrad
& Graduate

Visit Splash

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

1.99% – 5.41%5Undergrad
& Graduate

Visit CommonBond

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of September 9, 2020. Information and rates are subject to change without notice.
 


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 6.09% APR (with AutoPay). Variable rates from 2.25% APR to 6.09% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

4 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. ‍All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.