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How Much Are Collection Costs on Defaulted Student Loans?
Collection costs can take nearly 20% of any student loan payment you make, or increase your balance by up to 40%.
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NerdWallet's content is fact-checked for accuracy, timeliness and relevance. It undergoes a thorough review process involving writers and editors to ensure the information is as clear and complete as possible.
Ryan Lane is an editor on NerdWallet’s small-business team. He joined NerdWallet in 2019 as a student loans writer, serving as an authority on that topic after spending more than a decade at student loan guarantor American Student Assistance. In that role, Ryan co-authored the Student Loan Ranger blog in partnership with U.S. News & World Report, as well as wrote and edited content about education financing and financial literacy for multiple online properties, e-courses and more. Ryan also previously oversaw the production of life science journals as a managing editor for publisher Cell Press. Ryan is located in Rochester, New York.
Des Toups was a lead assigning editor who supported the student loans and auto loans teams. He had decades of experience in personal finance journalism, exploring everything from car insurance to bankruptcy to couponing to side hustles.
Lead Assigning Editor
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.
NerdWallet ratingNerdWallet's ratings are determined by our editorial team. The scoring formula for student loan products takes into account more than 50 data points across multiple categories, including repayment options, customer service, lender transparency, loan eligibility and underwriting criteria.
Credible lets you check with multiple student loan lenders to get rates with no impact to your credit score. Visit their website to take the next steps.
NerdWallet ratingNerdWallet's ratings are determined by our editorial team. The scoring formula for student loan products takes into account more than 50 data points across multiple categories, including repayment options, customer service, lender transparency, loan eligibility and underwriting criteria.
Fixed APR
3.95-10.49%
Actual rate will vary based on your financial profile. Fixed annual percentage rates (APR) range from 4.60% APR to 10.74% APR (4.35% - 10.49% with .25% auto pay discount). Variable annual percentage rates (APR) range from 6.13% APR to 10.74% APR (5.88% - 10.49% with .25% auto pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once a month, but there is no limit on the amount that the rate could increase at one time. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and require selection of our shortest term offered (5 years) and enrollment in our .25% auto pay discount from a checking or savings account. Enrolling in autopay is not required as a condition for approval.
Variable APR
5.88-10.49%
Actual rate will vary based on your financial profile. Fixed annual percentage rates (APR) range from 4.60% APR to 10.74% APR (4.35% - 10.49% with .25% auto pay discount). Variable annual percentage rates (APR) range from 6.13% APR to 10.74% APR (5.88% - 10.49% with .25% auto pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once a month, but there is no limit on the amount that the rate could increase at one time. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and require selection of our shortest term offered (5 years) and enrollment in our .25% auto pay discount from a checking or savings account. Enrolling in autopay is not required as a condition for approval.
Credible lets you check with multiple student loan lenders to get rates with no impact to your credit score. Visit their website to take the next steps.
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, for example, 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.
How much are private student loan collection costs?
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.
Rehabilitation collection costs
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.
Consolidation collection costs
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.
