How Much Are Collection Costs on Defaulted Student Loans?

Collection costs can take almost 20% of any student loan payment you make, or increase your balance by up to 40%.

Ryan LaneSeptember 30, 2020
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When a student loan defaults, your loan servicer can place it with a collection agency. Collection costs are one way these agencies earn money for recovering the past-due debt.

These costs can take almost 20% of any payment you make or increase your balance by as much as 40%. But you can lower collection costs on defaulted student loans — or potentially avoid them altogether — by getting your loans back in good standing.

Here’s how much you could pay in collection costs on defaulted student loans and how to decrease these fees.

How much you’ll pay for collection costs

By law, collection costs on federal student loans must be “reasonable.” The Education Department offers guidance on what that means, but the collection agency ultimately decides what to charge you.

Collection fees may be a portion of your payments or your loan’s balance:

  • Portion of payment. Most collection costs are paid this way, and the maximum an agency can take is roughly 20% of the payment. For example, you pay $100 on a defaulted student loan with 20% collection costs. The collection agency would first receive $20, then the remaining $80 would go toward your loan.

  • Portion of balance. If a collection agency assesses fees this way, the most it can charge is usually about 25% of your balance, though Perkins loan fees can reach 40%. Paying off a $10,000 loan with 25% collection costs would cost you at least $12,500 — $2,500 for the agency’s cut and $10,000 for the loan itself.

The sting of collection fees is less immediate than other penalties of default — like having your wages garnished or losing your tax refund. But these costs make it much harder to chip away at your balance and pay off your loans.

If your private lender successfully sues you over a defaulted loan, the court may assign you collection costs. The amount you’ll pay will likely depend on your loan’s contract and applicable state law.

How to lower collection costs on defaulted student loans

You can decrease collection costs by getting loans out of default. Student loan rehabilitation and consolidation can both return federal loans to good standing, but rehabilitation can offer greater savings — and may prevent collection costs from being added to your loan balance.

Collection costs depend on the type of defaulted federal loan you rehabilitate:

  • Federal direct loans. Collection costs remain roughly 20% of each payment. But the impact of that percentage may be much less because rehab payments can be as small as $5. These fees are not capitalized, or added to your loan’s balance, post-rehab.

  • Perkins loans. You can be charged collection costs of up to 24% of your outstanding balance after rehabilitation.

  • Federal Family Education Loans. Collection costs on loans from the Federal Family Education Loan, or FFEL, program can be up to 16% of your outstanding balance. These costs can be capitalized, but you also may be able to avoid them altogether by starting loan rehabilitation within 60 days of defaulting.

  • Collection costs depend on the method you choose to consolidate out of default:

  • Agree to repay under an income-driven plan. This is the faster option, but it comes with potentially higher collection costs — as much as 18.5% of the amount you owe. However, the Education Department says it generally charges $150, if that isn’t more than 18.5% of your balance.

  • Make three qualifying payments before consolidating. This lowers potential collection costs to 2.8% of your outstanding balance.

  • Collection costs are always capitalized if you consolidate out of default, increasing the amount you owe.

    If you have money to pay off your loan, you can ask the collection agency to waive the collection costs as part of a student loan settlement. Filing for bankruptcy could also eliminate collection costs — or your entire loan. But neither of these options is guaranteed to work.

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