The Department of Education uses several ways to collect outstanding federal student loans from borrowers; one of them is referring the borrower’s account to a collection agency. If an individual fails to make monthly payments for consecutive nine months, the guaranty agency may hire a collection agency to collect debt from the borrower. This is a collection attempt on the lender’s behalf, but it serves as a penalty for the defaulter because the collection agency charges fee for their services which is paid by the borrower, not the lender.
What are Collection Charges?
Collection charges are incurred when a borrower defaults on their student loan and the DOE gets services of a collection agency for collection of the outstanding loans. The collection agency collects the money from the borrower, keeps a certain percentage of what the borrower has paid, and gives the rest to the government. The amount that is kept by the collection agency is known as Collection Fee or Collection Charges.
Collection charges serve as an incentive to the agencies and encourage them to collected as much of the debt from the borrower as possible.
How Much Can A Collection Agency Charge?
The collection fee charged by a collection agency depends on the type of federal student loan taken out by the borrower and the average cost of collecting student loan debt. In addition to this, interest rate is also applied to the amount that is left after deduction of collection charges.
Rehabilitated and consolidated loans incur different collection charges, ranging from 18 percent to 40 percent of the outstanding loan debt. We are listing the average fee charged by collection agencies for different types of student loans.
Collection Fees for Direct, Perkins, and FFEL Loans
The collection charges for Direct and FFEL loans are capped at 25 percent of the total outstanding amount by the Department of Education. The outstanding amount used for the determination of collection fee includes both the principal amount and the interest charged.
For Federal Perkins loans, a collection agency may charge 30 to 40 percent of the debt as its fee.
Collection Fee for Federal Loans
There is no law regarding the amount that can be charged by a collection agency for the collection of debt on federal student loans. Generally, the rate of collection fee depends on the cost incurred on the collection of the debt and the overhead costs of the collection agency.
Collection Fee for Private Student Loans
Here, the promissory note signed by the borrower and the lender serves as the source of information for how much fees can be charged by a collection agency. It is illegal for the lender and their agency to charge anything in excess of the percentage mentioned in the contract.
Collection Fees for Consolidated and Rehabilitated Loans
The collection charges for rehabilitated and consolidated loans are capped at 18 percent of the total outstanding amount.
How the Student Loan Relief Department Can Help You?
Guaranty agencies and private lenders often employ collection agencies to collect outstanding debts. While collection fee is not a direct penalty for defaulting on your student loan, it is still considered to be a costly expense that can go as high as 40 percent of the payment you make to the lender. Therefore, it is important that you make timely payments in order to avoid paying extra costs.
The Student Loan Relief Department is a private company that was established with the aim of assisting individuals in repaying their loans. We help you avoid student loan default penalties by organizing your finances and helping you select the best loan repayment plan. In addition to this, we educate our customers regarding their rights and help them understand their options in case they face wage garnishment or tax offsets.
If you would like our experts to help you with student loan repayment, you can call us at (855) 880-0210.