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Student loans, Debt collection

What are my options when dealing with a collection agency working for the U.S. Department of Education?

If you default on a federal student loan, a third-party collection agency may attempt to locate you and collect payments from you.

Generally speaking, you have three options when dealing with the collector on a federal student loan:

1. Rehabilitation. Rehabilitation means that your loan will be taken out of default status after you make a series of consecutive (generally, nine) on-time, reasonable, and affordable, payments. You can typically only rehabilitate a loan once. This is the only way to remove the default notation from your credit history. If you chose to go back to school, you will also restore your eligibility for federal student aid after you make the sixth of nine monthly payments.

2. Consolidation. Through consolidation, your defaulted loans are paid off by a new loan with new repayment terms. If you cannot afford to repay your loan in full, this is the fastest way to get out of default and enroll in one of the U.S. Department of Education’s alternative payment plans. If you cannot afford to pay off your loan in full, it is also the fastest way to get out of default and restore your eligibility for federal student aid. Borrowers should also be aware that consolidation will not undo the negative effect on your credit report caused by your default.

3. Repayment. If you can afford to pay off your defaulted federal loan, this is the fastest way to settle your debt. Under certain circumstances, your debt collector may be authorized to waive some of your outstanding fees and other collection costs. For some borrowers, this can be the cheapest way to bring a federal student loan out of default. Your defaulted debt will be gone afterward, but it will continue to appear on your credit report as a defaulted loan that was repaid. You will also restore your eligibility for federal student aid, if you chose to go back to school.

When speaking with a collector, be sure that you have written documentation about what federal student debt you owe. If you are concerned that you never borrowed these loans, check the National Student Loan Data System. If the loan does not appear there, contact the collector and inform them of the problem. Remember, that system shows only your federal student loans, not your private student loans.

We have prepared sample letters that a consumer could use to respond to a debt collector who is trying to collect a debt along with tips on how to use them.  The sample letters may help you to get information, set ground rules about any further communication, or protect some of your rights. 

Remember that you have rights when dealing with debt collectors, and it is against the law for a collector to harass you or make false statements to you.

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