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How long will you owe a collection agency for student loan debt?

rehabilitate student loan debt with collection agencyQuestion: I have two student loans from both undergrad and grad school that total up to nearly $74,000.00. Due to a financial hardship my loans went into default and were turned over to a collection agency.

In May of 2009 I began to pay $255.00 every month for 11 months straight until I injured myself at work. I was placed on workman’s compensation for 9 months due to a broken ankle and two surgeries.

I received $2000.00 a month that helped pay monthly expenses with a child in college. In December 2010, 8 months later when I returned to work a garnishment was placed on my wages in the amount of $516.00 a month to the present date.

Here is where my problem began; I finally got up the courage to begin to look for my first home. I found one and tried to get pre-qualified. I was informed by the mortgage lender that my credit report does not state my payment history. I call the collection agency with my issue and they informed me that they would be willing to remove all negative information concerning my collection in 6 to 9 months if I agree to pay an additional $50.00 a month.

They stated that yes we are aware of your payments and explained after 6 months I could receive my financial aid back and after 9 months if they are able to find me a lender who is willing to consolidate my loans I can have the payments shown on my report. I explained that I am not interested in going back to school or receiving any additional aid. I just wanted my payments to be reflected on my reports.

My issues are the following:

1. I have paid on this loan for three years but it is not reflected on my credit report.

2. The fact that the “collect agency” is requesting an additional $50.00 a month for some type of hope/dream of my loan being picked up by another lender.

3. My payments total payments so far total $13,585.47 with the collection company receiving $2,248.78.

4. Is there any way I can have the garnishment removed from involuntary to voluntary.

5. My loan interest rate is 2.4% on one of the loans and 3.52% on the other. While the collection agency is collecting 15% and this will increase to 18.5% once a “lender is found?”

6. Why would I still have to pay the collection agency if my loan is out of default and with a lender.

7. Is all this legal? Are there no other options for me?

The way I understand this is I will not only owe this debt for my education for the rest of my life but I will also owe the Collection Company.  Thank you in advance for any advice.

Answer: You are not alone in attempting to resolve student loan debt. Student loan debt hit $1 trillion in 2011, surpassing even credit card and auto loan debt. I am not an attorney; therefore, I cannot offer you legal advice. However, I will attempt to answer some of your questions:

The government can garnish wages without a court order, seize tax refunds and even seize a portion of social security benefits. And, there is no time limit for collection on federal student loans.

From the information you provided I am going to assume your loans are in rehabilitation status. This means collection agencies must follow guidelines set forth by the Department of Education.

Payments on credit reports. Collection agencies are not original creditors or lenders; therefore, they do not report monthly payment history to the credit bureaus. What is reported by collection agencies are unpaid or paid account balances. Once your loans are with a lender, they will report your payment history to the credit bureaus.

Collection agency requesting additional funds. The Department of Education only contracts with certain collection agencies to administer the collection activities of defaulted loans. Accounts assigned to a collection agency are assessed additional collection costs but there should not be an additional $50 monthly charge to have your accounts removed from the credit bureaus because that is already a benefit of student loan rehabilitation.

Below are the benefits of student loan rehabilitation:

  • Your loan(s) will no longer be considered to be in a default status.
  • The default status reported by your loan holder to the national credit bureaus will be deleted.
  • You will be eligible for the same benefits that were available on the loans before the loans defaulted. This may include deferment, forbearance, and Title IV eligibility.
  • Wage garnishment ends and the Internal Revenue Service no longer withholds your income tax refund.

You have already entered into a rehabilitation payment amount. Since you have been paying that amount it is probably reasonable. The collection agency cannot all of sudden require you pay more. You have the right to pay only what is reasonable and affordable.

Interest Rates. The loan holders will generally add collection costs to the new loan balance, but this should be no more than 18.5% of the unpaid principal and accrued interest at the time of the sale of the loan. The law requires the defaulting borrower be charged “reasonable collection costs.”

Take matters into your own hands by asking the original lender to take back the loan. You do not have to wait on the collection agency to find a lender to buy the loan once your loan has been rehabilitated and out of default status. If you are able to work out a repayment agreement with the original lender they will no longer have to pay the collection agency a commission and this could be an incentive to pull back your loan.

Once your loan is rehabilitated, it is out of default which means you are eligible for any of the flexible repayment plans available to student loan holders in good standing. Flexible repayment plans can include the following depending on the type of loan you have:

  • Standard Repayment
  • Extended Repayment
  • Perkins Loans Repayment
  • Direct Loan Income Contingent Repayment Plan
  • Income-Based Repayment Plan
  • Public Service Forgiveness

Voluntary vs. involuntary garnishment. I really don’t see what difference it will make. The time to negotiate ended when your wages were garnished. But I suggest you consult an attorney regarding that matter because when wages are garnished, the Department of Education or a guaranty agency more than likely notified you before the garnishment.

If you failed to take the opportunity for a hearing within the allotted time-frame to challenge the debt and repayment schedule, then you may have no recourse at this time to change the status of the garnishment.

Do your Research. You are going to have to do some research to see what is available for your type of loan. A good place to start is the Department of Education Ombudsman’s website along with the National Consumer Law Center’s Student Loan Assistance website. There is a lot of information that can help you organize a plan of action and get those student loans under control so you can qualify for a mortgage for your first home.

At the end of the day, I believe rehabilitating your loans is your best recourse because your credit score will benefit.  The interest and fees that are added may be worth recovering your credit score. It sounds like you have a good payment history with the collection agency.

Even though it does not count on your credit report, it is a great incentive for a new lender to purchase your loan. You may end up paying a lot less once your loan is purchased. And, depending on how you file your taxes you may be able to deduct the interest paid on the student loans.

Contact the Department of Education. Collection agencies contracted by the Department of Education are required to have at least two people designated to handle complaints.  If you are having trouble dealing with the collection agency you can ask for their designated “complaint” person.

However, your concerns can be taken directly to the Default Resolution Group. The Department of Education requests that you call the Default Resolution Group call center at 1-800-621-3115 first. They will direct you to the correct Special Assistance Unit personnel.

If the Special Assistance Unit is not able to resolve your concern, you may file a written complaint with the Department of Education.  Notify them in writing of your complaints concerning the collection agency.  The complaints are taken seriously since the collection agencies are contracted by the government. They can take action to resolve the matter on your behalf.

To file a written complaint, you should send a letter with any evidence to:

Chief of Contract Analysis and Compliance
US Department of Education
61 Forsyth Street, SW 19T89
Atlanta, GA 30303

After you have done your research and made complaints, if you still can’t get anywhere, consider contacting an attorney. The best of luck to you.

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