How To Get Your Student Loans Out of Collections

Falling behind on student loan payments can have serious consequences, including default and eventually collections. According to the U.S. Department of Education, more than 5 million federal student loan borrowers are currently in default, which can lead to wage garnishment, damaged credit, and added financial stress.

If your loans are in collections, you still have options to regain control of your debt and minimize the long-term impact. Here's what you need to know about how collections work and the steps you can take to get your student loans back on track.

What does it mean for student loans to go into collections?

If you miss a student loan payment, your loan may go into default and eventually collections. Federal loans enter default after 270 days of non-payment, while private loans can default after just one missed payment, depending on your lender's policies.

Once in default, your loan may be transferred to a debt collection agency tasked with recovering the overdue balance. This can lead to frequent contact from collectors and serious financial consequences, such as:

• Wage garnishment: A portion of your paycheck may be withheld to cover the debt.
• Seizure of tax refunds or federal benefits: The government can redirect these payments to offset your unpaid federal loans.
• Loss of federal aid eligibility: You may no longer qualify for federal financial aid or benefits, including deferment or subsidized loans.
• Credit damage: Collections activity can lower your credit score, with records of the account remaining on your credit report for up to 7 years, even if you pay off the debt.

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Options for getting student loans out of collections

If your student loans are in collections, you have options to resolve the situation and regain financial stability. The steps you can take depend on whether your loans are federal or private.

1. Rehabilitation for federal loans

For federal student loans, rehabilitation is one of the most effective ways to get out of collections. This process involves making nine on-time monthly payments within a 10-month period. Once you complete rehabilitation:

• The loans will no longer be in default status, and wage garnishment will stop.
• The record of the student loan default will be erased from your credit history, although late payments made before the default may still appear.
• You'll regain eligibility for federal financial aid, including deferment, forbearance, loan forgiveness, and income-driven repayment plans.

2. Consolidation to resolve default

Loan consolidation is another way to get out of default on federal student loans and end collections activity. This student loan default recovery process involves combining your defaulted loans into a new Direct Consolidation Loan, which is used to pay off the original loans.

To qualify, you must meet one of the following conditions:

• Agree to repay the new consolidated loan under an income-driven repayment plan.
• Make three consecutive, on-time, voluntary payments on the defaulted loan before consolidation.

While consolidation can help resolve default and end collections activity, it's important to consider the potential drawbacks.

Consolidation does not remove the record of default or late payments from your credit history, which can continue to weigh down your credit score. Additionally, unpaid interest on the defaulted loan is added to your principal loan balance, a process known as interest capitalization. This means you'll pay interest on a higher balance, increasing the total amount you repay.

Even with these disadvantages, loan consolidation offers valuable benefits. It restores your eligibility for federal loan programs, including deferment, forbearance, and forgiveness options. You'll also regain access to federal student aid, which is especially important if you plan to return to school.

See Also: Rehabilitation vs. Consolidation: Compare Your Options

3. Negotiate a settlement with your lender

If you have private student loans in collections, you may be able to negotiate with your lender to cut some of your costs or come up with a feasible repayment plan.

Many lenders are willing to work with borrowers, especially those experiencing financial hardship. Your lender may offer options such as waiving fees, reducing collections costs, or even settling the debt for less than the total owed.

Contacting your lender is the first step. Be honest about your financial situation and ask about potential solutions. They might propose a structured repayment plan that allows you to begin paying down the balance or offer a lump-sum settlement to settle the debt.

How to start the loan rehabilitation process

The full federal student loan rehabilitation process can take several months to complete. To get started, contact your loan servicer. If you're unsure who your servicer is, log into your StudentAid.gov account to find their details and contact information. From there, the process will depend on the type of loan you have.

For Direct Loans and Federal Family Education Loan (FFEL) Program Loans, you'll need to set up a written rehabilitation agreement, where you agree to make nine on-time, voluntary monthly payments within 20 days of the due date over 10 consecutive months.

Your loan servicer will calculate a reasonable payment amount based on your income. Generally, this means 15% of your discretionary income divided by 12, though some borrowers may qualify for a lower rate of 10%. Discretionary income is defined as your adjusted gross income minus 150% of the federal poverty guideline for your family size and state.

The process is similar for Perkins Loans. You'll need to make nine consecutive monthly payments, each within 20 days of the due date. As with other federal loans, your servicer will determine the payment amount based on your income.

Once rehabilitation is complete, the default status will be removed from your credit report, and you'll regain access to federal student aid, repayment plans, and other borrower benefits.

Managing private student loans in collections

If your private student loans are in collections, addressing the issue quickly is essential. Ignoring debt collectors can escalate the situation, potentially leading to legal action. Instead, engage with the collector, know your rights, and keep detailed records of all communications.

Debt collectors are legally required to provide key details about your debt, including a statement, the account number, the creditor's name, the current balance, and instructions for disputing the debt if needed. Be sure to request this information to verify the debt before moving forward.

While paying the full amount is the simplest way to resolve the debt, you may be able to negotiate a lower settlement or arrange a payment plan.

“Lenders are more likely to accept a settlement when you have been in default for a long period of time and the settlement amount is at least the amount they expect to recover long-term,” says Mark Kantrowitz, author of “How to Appeal for More College Financial Aid.”

To start working towards a settlement, ask for a written confirmation from the debt collector that will help you verify the debt is yours and confirm the total amount you owe. Then, assess your budget to decide what you can afford to pay as a lump sum or in installments. Present your proposal to the collector, clearly explaining your financial situation.

If you reach an agreement, ensure it is documented in writing and signed before making any payments.

Tips for preventing future loan collections

Staying proactive with your student loans is the best way to avoid collections.

“Paying attention to what the Department of Education is telling us is more important now than so many years in the past,” says Katherine McKay, associate director of the financial security program at the Aspen Institute.

Describing the current political environment as a “moment of real uncertainty,” particularly regarding potential changes to federal student aid policies under the Trump administration, it's possible officials may “try to update procedures to start addressing defaulted student loans more quickly,” McKay says.

To keep your loans from reaching collections, consider the following strategies:

• Sign up for income-driven repayment: Getting on an income-driven payment plan can help you avoid getting behind on your loan payments by adjusting the amount you owe each month based on your income. Depending on your earnings, this could offer more affordable monthly payments that feel more within your budget to feasibly make.
• Set up autopay to avoid missed payments: If you know you have a tendency to forget deadlines, consider setting up automatic payments to ensure you pay the amount due on time. In many cases, you can even secure an interest rate discount by enrolling in autopay. Just make sure you have enough in your account to avoid overdraws.
• Communicate with your lender sooner rather than later: If you encounter a bump in the road, like an unexpected layoff or medical issue, that prevents you from paying your student loans, be proactive and contact your lender to let them know. Discuss your situation with them and see what options they may be able to offer to help.