Student Loans and Collection Agencies: A Match Not Made in Heaven

This site has already addressed several issues with respect to student loans, and collection agencies.  However, a greater portion of student loan lenders are now utilizing private collection agencies to recover on defaulted student loan debt.  This includes both private and governmentally guaranteed student loan debt, and collection agencies are eagerly seeking to undertake collection of these debts. Traditionally, student loan lenders have been the most passive when it came to a debt collection, and consumers interpreted this as a lack of concern by the lender, generating a false sense of security.  As a result, borrowers focused their attention on the more aggressive/persistent creditors.  The attitude of the student loan industry has changed considerably due to rising defaults and collection difficulties.  Why the interest from the professional collection industry?  There are several reasons:

–          Student loans, with very, very limited exception, are non-dischargeable in bankruptcy. And there is no statute of limitations that would eventually protect a consumer, unlike credit card debt.

–          The federal government allows for the collection of student loan debt in manners not available to regular unsecured creditors.  Student loan lenders can seize your income tax refund, and can obtain an administrative wage garnishment against your pay, entitling them to deduct 15% of your income.  Other unsecured creditors would have to file a lawsuit and obtain a judgment against you before they could collect through a wage garnishment. (cite)

–          Collection agencies believe that consumers who have acquired student loan debt will be more capable of repaying the debt, given the benefit of their education.  Of course, if the consumer did not complete their education, or is unemployed, this would not be a factor.  But unemployment or lack of degree is not going to stop the collection attempts.

The Federal Trade Commission fields more complaints about debt collection agencies than any other industry.  The collection of student loan debt offers a fertile ground for abuse of the consumer’s rights under the Fair Debt Collection Practices Act (FDCPA), so keep in mind the following if you are contacted by a debt collector on a student loan debt:

–          They are NOT a government agency!  Evidently, some collectors are stretching the limits of the FDCPA by implying that they are acting under the authority of – or in coordination with – the federal government.  Even if the debt is federally guaranteed, no additional status is conferred upon the collector.

–          They are required to notify you that they are a collection agency.  I have reviewed several letters from collection agencies to consumers, seeking to “collect” a student loan debt.  However, nowhere in the letter does the collector identify itself as a debt collector. Instead, the letter will state that the collector is contacting the consumer to discuss a “payment plan”.  This is a veiled attempt to catch the consumer with their guard down.

–          They cannot prevent you from filing for bankruptcy. While a student loan debt cannot be discharged in bankruptcy, the existence of the debt does not prohibit a consumer from seeking bankruptcy relief for other reasons.  Likewise, collection agencies have to follow the same rules in bankruptcy as everyone else – no contact with the consumer without court permission.

–          Any disputes must be stated in writing.  Some individuals may have legitimate disputes regarding the student loans.  While you can always disagree over the phone, any dispute should be commemorated in a latter, mailed to the collection agency, with a return receipt requested.

To summarize, this is a classic situation where an ounce of prevention is worth a pound of cure.  So if you have student loan debt, the key is to keep it from going into default.  Keep the following in mind:

–          Try to make some attempt at repayment as soon as possible.  Avoid the temptation to obtain additional deferments or forbearances that will only increase the amount that is owed.

–          Contact the lender if you are struggling to see if they have any in-house programs that will keep the student loans from going into default.  Collection agencies will only be engaged when the loans go into default, so keeping them out of default status is critical.

–          If your student loans are already in default, visit  This website offers income based repayment plans for qualifying defaulted loans.  If the repayment plan is successfully maintained for one year, the loans will be removed from default status.  Make sure that you will not be subject to collection agency harassment while you are participating in such a program.