If you default on your student loan, the creditor (often the Department of Education if you have a federal loan) may send your account to a collection agency. If this happens, the debt collector can charge collection fees in addition to the amount that you already owe. The amount of collection fees for federal student loans can be between 18% and 40% of your loan balance, depending on
- what type of student loan you have, and
- whether you are rehabilitating or consolidating your loans.
Private student loan collection fees are usually set by your student loan contract or state law.
What Are Collection Fees?
When the Department of Education sends your loan to a collection agency, the collection agency keeps a portion of what you pay without sending it to the Department. To make up for what the collection agency is keeping, and to make sure it gets paid in full, the Department of Education instructs the collection agency to charge you collection fees. In other words, collection fees cover the amount that the collection agency charges the Department of Education for its collection actions.
Collection fees do not include interest and attorney’s fees. A collection agency charges these fees only after you are referred to it.
A percentage of every payment that you make on your student loan goes towards the collection fees. For example, if a collection agency charges 25%, and you pay $1, only $.75 will be applied to your loan balance. The rest ($.25) will go towards the collection fees.
Collection Fees for Federal Student Loans
There is no law capping what debt collectors can charge for collection fees on federal student loans. However, collection fees must be “reasonable.” Collection agencies usually set fees as a percentage of the total principal and interest that you owe on your student loan. The debt collection agency comes up with the percentage by:
- calculating the percentage of their overall revenue that they spend on overhead, and
- charging that same percentage to each borrower.
Collection fees are limited in a few situations.
Collection Fee Caps on FFEL, Direct, and Perkins Loans
The Department of Education requires that debt collectors who collect on FFEL and Direct Loans must limit their fees to 25% of the loan balance (principal and interest). For Perkins loans, the Department of Education requires collectors to cap their fees as well -- between 30% to 40%, depending on whether the loan is in litigation. (To find out what type of loan you have, see Types of Federal Student Loans.)
The collection agency must apply this percentage to your principle and interest only, not to any collection fees which it has already charged to you and added to your balance.
Collection Fee Limits for Rehabilitation and Consolidation
Collection agencies can only charge 18% in collection fees if you rehabilitate or consolidate your student loan.
Rehabilitation. If you enter into a rehabilitation agreement, the collection agency will adjust your collection fees downward to 18%. The collection fees will be added to the total that you owe when your loan is rehabilitated and another lender purchases it. (Learn what is means to rehabilitate your student loan.)
Consolidation. The collection agency will also adjust your fees to 18% if you consolidate. The 18% fee will be added to your new loan balance, and considered to be additional principle. (Learn about consolidating student loans.)
Tax Refund Offsets
If the Department of Education takes your tax refund (called a tax refund offset), it cannot charge collection fees. For this reason, you might benefit from a tax refund offset because 100% of the refund will be applied to the principle and interest on your student loan, and 0% will go to collection fees. (To learn about other ways that the Department of Education and its collectors can collect on defaulted federal student loans, see What Happens If You Default on a Student Loan?)
Collection Fees for Private Student Loans
The amount of collection fees that debt collectors can charge to collect private student loans is set by your promissory note (the contract you signed when you got your student loan). Whatever collection percentage is in your promissory note is the maximum that the debt collector can charge, unless your state law sets a lower limit.
Because the promissory note sets the collection fee percentage, if the collection agency sues you on defaulted private student loans, the court might not allow it to get a judgment for collection fees if the collector cannot provide the court with a copy of your promissory note.
If you can pay off the entirety of your interest and principle, some collection agencies for private lenders will waive the collection costs. (Learn the methods debt collectors can use to collect on private student loans.)