Defaulted Student Loans and Collection Costs

Student loan borrowers in default now have more options than ever before to repay their student loans. The U.S. Department of Education's Collections Department is committed to assisting those in default by making repayment of their debts a simple process.

This site will provide you with information on the following loan programs:

Federal Family Education Loans (FFEL), which include Federal Stafford and Federal PLUS loans. When placed in default, these loans are first assigned to a guaranty agency (an organization that administers the FFEL Program for your state) for collection. Periodically, guaranty agencies assign loans to the Department for collection.
Direct Loans. Federal Stafford and PLUS loans are also offered through the William D. Ford Direct Loan Program. When placed in default, these loans are assigned to the Department's Debt Collection Service.
Federal Perkins Loans. When placed in default, Perkins Loans may remain with the school or be assigned to the Department for collection.

If you are not sure what type of loan you have, check your promissory note. If your loan is not one of the loans listed above, the information in this section does not apply to you.

For student loans authorized under Section 435(i)Title IV of the Higher Education Act, default occurs on a Federal Family Education Loan (FFEL), which include Federal Stafford and Federal PLUS loans, after a default has persisted for 270 days in the case of a loan repayable in monthly installments or 330 days in the case of a loan repayable in less frequent installments. The change is effective for loans for which the first date of delinquency occurred on or after October 7, 1998.

During the delinquency period, the lender must exercise "due diligence" in attempting to collect the loan; that is, the lender must make repeated efforts to locate and contact you about repayment. If the lender's efforts are unsuccessful, it will usually take steps to place the loan in default and turn the loan over to the guaranty agency in your state. Lenders may "accelerate" a defaulted loan, which means that the entire balance of the loan (principal and interest) becomes due in a single payment.

Once your loan is assigned to a guaranty agency or the U.S. Department of Education for collection, the following steps may be taken to recover the outstanding balance due:

The U.S. Treaury many withhold your payments toward repayment of your loan.
You may have to pay additional collection costs.
Also, you may be subject to Administrative Wage Garnishment, whereby the Department will require your employer to forward 10% to 15% of your disposable pay toward repayment of your loan.
Federal employees face the possibility of having 15% of their disposable pay offset by the Department toward repayment of their loan through the Federal Employee Salary Offset Program.
The Department may take legal action to force the you to repay the loan.
Finally, credit bureaus may be notified, and your credit rating will suffer.

Once a loan is declared in default, you are no longer entitled to any deferments or forbearances. In addition, you may not receive any additional Federal student aid if you are in default on any student loan.

Collection Costs

Pursuant to the Higher Education Act and the terms of most borrowers' promissory notes, you are liable for the costs of collecting your defaulted Federally-financed student loans. The largest of these costs is usually the cost of contingent fees that may be incurred to collect the loan.

The Department gives you repeated warnings before it refers a debt to a collection contractor. If those warnings do not persuade you to reach repayment terms on defaulted loans, the Department refers those loans to collection contractors. The contractors earn a commission, or contingent fee, for any payments then made on those loans.

The Department charges each borrower the cost of the commission earned by the contractor, and applies payments from that borrower first to defray the contingent fee earned for that payment, and then to interest and principal owed on the debt. As a result, the amount needed to satisfy a student loan debt collected by the Department's contractors will be up to 25 percent more than the principal and interest repaid by the borrower. On each billing statement, the Department projects an estimate of the total amount needed to satisfy the debt on the date of the statement, including collection costs that would be incurred by payment in full of that amount.

Wage Garnishment

Under the Higher Education Act, the Department and guaranty agencies may require employers who employ individuals who have defaulted on the repayment of a student loan to deduct 10% of the borrower's disposable pay per pay period toward repayment of the debt. Also, the Debt Collection Improvement Act of 1996 permits the Department to garnish up to 15% of disposable pay. Garnishment may continue until the entire balance of the outstanding loan is paid. You should note that wage garnishment is used only for borrowers who refuse to voluntarily repay their defaulted loan and is not used with those borrowers who continue to make regular and timely monthly payments.

Litigation

The Department and guaranty agencies also pursue recovery of defaulted student loan debts through litigation. If you refuse to voluntarily repay your student loan, you may be sued in State or Federal District Court for the outstanding balance plus attorney's fees and court costs.