Debt collection of student loans is on the rise, as the number of student loans in default continues to rise.
The good news is that debt collectors collecting on student loans are governed by the FDCPA, which protects consumers against abusive and unfair collection practices. The bad news is that collection of student loans is a booming business.
If you are being contacted by a debt collector about your student loans, here are some things you need to know.
You are protected against unfair or abusive debt collection
Student loans are considered a consumer debt, which means that debt collectors collecting on student loans are governed by the FDCPA.
That means a debt collector cannot mislead you, cannot harass you, and cannot engage in unfair or abusive debt collection tactics. For example, if a debt collector is collecting on a private student loan, they cannot threaten to sue you (unless they intend on actually doing it), they cannot collect on an improper amount, and they cannot lie to you about the applicable statute of limitations for the loan.
For federally backed student loans, the government contracts with a number of private companies to collect on defaulted loans. Federal loans provide borrowers with guaranteed repayment options. If a debt collector misleads or misrepresents a consumer about those options, that can be a violation of the law. Or if a debt collector contacts a consumer’s employer about a loan, or contacts a consumer’s family member(s), that can also be a violation of the law.
The collection options depend on the type of loan
The first step is to determine what kind of student loans you have: federal or private. If you are unsure, there are a couple of ways to figure that out. One, you can ask your servicer/guarantor. If you are being contacted by a debt collector, they should be able to tell you as well. Two, you can look up your loans on the National Student Loan Database. If your loans are listed in the database, they are federal. Private loans are not listed in the database.
Collection of private loans
The methods for collecting private student loans are generally the same as any other type of consumer debt (like credit card debt, medical debt, etc.). That generally means unless there is a judgment, the creditor cannot forcibly collect money through bank or wage garnishment (note: Minnesota does allow garnishment once a lawsuit has started but before a judgment is obtained in very limited circumstances).
That is fundamentally different from federal loans, where the Department of Education has fairly broad and far-reaching rights to collect the debt without a lawsuit.
For private loans, the collection cycle could involve any or all of the following:
- collection calls/letters from the actual guarantor (or loan servicer)
- collection calls/letters from a third party debt collector
- collection calls/letters from a law firm or attorney
- lawsuit from a law firm or attorney
- collection of a judgment by a law firm/attorney
It’s important to understand the difference between collection calls/letters and a lawsuit/judgment. Attempts to collect a debt are simply that—asking you to voluntary pay money. Except for extremely limited circumstances, unless there is a judgment, there is no way to forcibly collect funds.
Collection of federal loans
If the government wants to collect money from you, the government will get it in all likelihood.
Unlike private loans, the Department of Education (DOE) can begin collecting on a defaulted student loan without a lawsuit and/or judgment. On top of that, once your federal loans go into default, collection fees of 16% (or potentially higher) of the balance can be added to your student loan debt. That’s a lot of cash. Even if you successfully rehabilitate your student loan, the majority of those collection fees will remain on your account.
For federal loans, the collection process could involve some/all of these steps:
- Loan(s) go into default (default = 270 consecutive days of non-payment)
- Department of Education may notify the borrower they are in default
- Department of Education refers the account to one of the many private collection companies that have contracts with the Department of Education
- Private debt collector contacts borrower and notifies them of default
- In some cases, the borrower has a chance to cure the default before collection fees are added (note: this appears to be hit or miss)
If the default is not cured, the collection process could involve some/all of these steps:
- Collection fees are added (16% or potentially higher)
- Department of Education pursues administrative wage garnishment (borrower will provided advance notice of this)
- Department of Education pursues administrative tax refund capture (borrower will provided advance notice of this
- Department of Education pursues social security capture (borrower will provided advance notice of this)
- Department of Education sues borrower (unlikely – mostly because the government does not really need to do it to get paid)
There are limits to the amount of funds that can be recovered through these methods. Wage garnishment is limited to 15% of a borrower’s disposable income. Tax refund capture is not limited to any set amount. Social security can only be garnished up to maximum of $9,000 per year, and it cannot reduce a monthly benefit below $750/month.
Stopping the collection process
Your options for getting out of default and/or stopping the collection process will vary depending on what type of loan (private or federal) and the status of your loan (default, in collections, post-judgment, etc.). Generally, if you are earlier in the collection process, you should have more options. If you need specific legal advice for your situation, you should contact an attorney immediately.
If you have federal loans, you can check out the government’s information on getting out of default: https://studentaid.ed.gov/repay-loans/default/get-out
You can also try contacting the federal student loan ombudsman to see if they can provide any assistance: https://studentaid.ed.gov/repay-loans/disputes/prepare/contact-ombudsman
There is no consensus website for private student loans, because each loan is different and governed by the terms and conditions of that particular loan.
However, if you are having issues with negotiating an affordable repayment, the CFPB has provided a sample form letter that you can use to contact the borrower or servicer: http://www.consumerfinance.gov/blog/struggling-private-student-loan-borrowers-still-searching-for-help/
When in doubt contact an attorney
Student loans are complicated and usually involve large amounts of money. Given the potential ramifications of a defaulted student loan, talking to an attorney is a good idea. Even if you just need to understand your options, choosing one option over another could result in a significant savings down the road.
Contact me today to discuss your student loans and your options.