Student Loan Debt in Collections? Try These 5 Steps


We are all too familiar with the stats when it comes to student loan debt. American borrowers owe more than 1.2 trillion in student loan debt, and more than 70% of U.S. college graduates have student loans of some sort. This staggering amount of student loans has far surpassed credit card debt, which now stands firmly in second place behind mortgage debt as the largest source of U.S. debt.

But the less-mentioned student loan debt problem is the rising default rate. According to the National Student Loan Data System, 12% of subsidized loans, and 25% of Family Federal Education Loans (FFEL), were in default in 2015.

If you're in this situation, and your student loan is on the brink of default, here are five steps to handle student loan debt in collections.

1. Check Your Credit

If you haven't bothered to open up your student loan statement recently, it might be time to check your credit report. Many people don't realize that their student loans are actually in default and spend years thinking the loan must've magically disappeared, or the student loan fairy came and paid off the debt.

Once your loan goes into default, it is handed over to a collection agency. An account in collection significantly affects your credit score. While this might not matter to you now, if you're thinking about buying a house or a car or applying for a credit card, you might find yourself out of luck with a low credit score.

It's easier than ever to check your credit fast and easy. There are loads of apps you can use, like Credit Karma and Credit Sesame, that will show your credit score and give you tips on how to better your score. You can also check your credit for free at — you'll receive your credit report, but will need to pay a small fee if you want to get your actual score.

Also, many credit card companies now include your credit score on your monthly statement with some detail about your score.

2. Rehab Your Loan

The next step is to get your loan in a rehabilitation program. Contact the collection agency handling your loan and ask them how to enter the rehabilitation program.

Rehabbing a loan is critical because once your student loan is in collections, there are many adverse consequences that extend beyond your credit score. Some collection agencies will garnish your wages to recoup the balance that is owed. Not only can your paychecks be tapped, but also your highly-coveted tax return money.

Rehabbing a student loan is just like any other form of rehab — you've got to get super committed to the process to see results. Rehab brings your loan safely out of default, which will help repair your credit score. It's a process, so make sure you understand exactly what you need to do with each collection agency to bring your loan back to life.

3. Always Pay on Time

Once your loan is in rehab, paying on time will be your best ally in winning the war against student loan default. Rehab offers you a chance to get right with your loan, often through small monthly payments based on your income.

The key to loan rehab is to make nine consecutive monthly payments on-time while in the program before your loan can be taken out of collections and sent to a new loan servicing company. At that point, your default status will be removed, and you'll also have access to programs like deferment and forbearance.

4. Get It in Writing

As with most things in life, getting something in writing is your best defense. The same goes for student loan rehabilitation. Once you've made your nine monthly on-time payments and your loan rehab is complete, kindly ask the collection agency for a nice letter stating that all related negative marks from your student loan record have vanished.

Now, this is the tricky part. Collection agencies aren't known for their excitement over supplying a letter in writing, which again is why you need to ask in your nicest voice and use a lot of "pretty pleases."

This letter is worth its weight in gold to you, though. It is what you will send to the three main credit bureaus — Experian, TransUnion, and Equifax — to ensure that the marks are removed. Make sure that the letter includes your name, the name of the collection agency, the account number that the letter is referencing, and the date the loan rehabilitation process was completed.

5. Stay on Track

The last step may seem like an obvious one, but staying on track is the best way to keep your student loans out of collections. Once you've gone through all the work of rehabbing your loan, the last thing you want to do is undo that process by neglecting your student loan.

Here are a few steps to stay on track:

  • Select a new payment plan that works with your budget. There are countless payment plan options like Pay As You Earn, which adjusts with your salary.
  • Put your new student loan payments on auto-debit each month so that you make sure it's getting paid.
  • Create a new monthly budget that includes your student loan payment and scrub through your bank statements to find ways to save money each month. There are lots of mobile apps to help you.
  • Regularly check your credit score to ensure that you're not missing any payments and that your credit score is improving.

If your student loan debt is in collections, it's not the end of the world. It happens to thousands of people each year, so you're not alone. However, you'll want to make sure that you follow these steps, rehab your student loan, and find ways to make your student loan payments work in your budget.

How are you doing with your student loans?

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Paying on time and staying on track is easier if you automate the payment of your student loans. There are services available that manage the payment of your bills and help you pay them off faster.