Fees for student loan collection can cost borrowers a lot of money and add to student loan balances. Private collectors do not work for free. The government pays these collectors, usually on a commission basis. This adds substantial charges to the collection process. (See sample).
Collection Fee Amounts
Borrowers are liable for costs of collected defaulted loans pursuant to the Higher Education Act and the terms of most borrowers’ promissory notes. According to an explanation on the Department’s web site: “The largest of these costs is usually the cost of contingent fees that may be incurred to collect the loan…The contractors earn a commission, or contingent fee, for any payments then made on those loans. The Department charges each borrower the cost of the commission earned by the contractor, and applies payments from that borrower first to defray the contingent fee earned for that payment, and then to interest and principal owed on the debt. As a result, the amount needed to satisfy a student loan debt collected by the Department’s contractors will be up to 25% more than the principal and interest repaid by the borrower.”
If a contingency-fee arrangement is used, the Department may compensate collection agencies based on the average cost per borrower rather than the actual fees incurred in collecting from any particular borrower. This percentage or average approach often leads to unfair results since the small number of defaulting consumers from whom recovery is made bear the brunt of all of a creditor’s collection expenses. Also, the collector receives a commission on a payment as long as the collector has been assigned the file, whether or not payments were collected as a result of the collector’s actions.
|Example:Janet’s current student loan obligation, including principal and interest, is $10,000. Assume that the commission paid to collectors is 30% of the amount collected. Even if Janet immediately pays the full $10,000, the government will first apply the funds to pay the collection commission, leaving only $7,000 to apply to the outstanding balance. This means that Janet’s obligation is lowered only to $3000. To pay off the $10,000 balance, she must immediately pay $14,285.71. The government will apply 30% of that amount (30% of $14,285.71 is $4285.71) to collection costs. The remainder ($10,000) pays off the loan.|
There are some limits on the collection fees that the government can charge. Fees are limited to 16% (as of July 1, 2014) at the time of sale for rehabilitation. The limit is 18.5% for consolidation loans, but the Department has said that it routinely charges a lower percentage. The Department says that it waives the fees for rehabilitations on Direct Loans. In July 2015, the Department clarified that borrowers who enter into repayment arrangements after default should not be charged collection fees. However, the Department’s collectors may state in rehabilitation agreements (or elsewhere) that they will charge these fees in the future if the borrower re-defaults after a successful rehabilitation.
Outside of rehabilitation and consolidation, the limit is that fees must be “reasonable.” The Department states that it will charge up to 25% more then the principal and interest paid by the borrower.
Perkins collection fee limits are 30% of principal, interest and late charges for first collection efforts and 40% for subsequent collection efforts.
The collection fees for private loans should be stated in the loan agreement. The lender should not be allowed to charge collection fees unless there is a provision like Section L of this agreement. There may be other laws in your state that place additional restrictions on the amount of collection fees that private creditors can charge.