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

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. The government then deducts an amount roughly equal to the commission it has paid its collector from the payments borrowers make. Only the amount left over after the commission is paid is applied to interest and then principal, in that order.

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 18.5% at the time of sale for rehabilitation and the same limit applies to consolidation loans. Otherwise, the limit is that fees must be “reasonable.” The Department states that it will charge no more than 25% of outstanding principal and interest.

There are new rules for Perkins loans effective November 1, 2007. Perkins collection fee limits are now 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.