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.
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. The limit is only that the fees must be reasonable.
According to an explanation on the Department’s web site: “If you do not enter into a repayment agreement for your defaulted federal student loans, ED will refer your loans to a private collection agency. Private collection agencies earn a commission for any payments you make on loans that ED has referred for collection. When you make a payment, the payment is first applied to the amount of the commission that the private collection agency earned, with the remainder of the payment being applied to interest and principal on your loan. This is one reason that defaulting on your federal student loans can significantly increase the total cost of your loans. On each billing statement, ED projects an estimate of the total amount needed to satisfy the debt on the date of the statement, including collection costs.”
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. The limit is 18.5% for consolidation loans, but the Department has said that it routinely charges a lower percentage.
The fees for rehabilitations depends on the type of loan you have. The Department says that it does not currently add collection fees to the new loan balance after a successful rehabilitation of a Department-held loan. In October 2016, the Department summarized its rehabilitation collection fee policy for Department-held FFEL loans and Direct Loans on its Servicing and Collection FAQ site: For both Department-held FFEL loans and Direct Loans, “…if the borrower is assigned to a PCA [collection agency], collection fees are charged against each of the nine qualifying [rehabilitation] payments; approximately 20% of each payment would apply to collection fees, with the rest applying to interest and/or principal. Once full eligibility for rehabilitation has been achieved, only the principal and interest balance of the loan is transferred to a non-default servicer. From that point forward, no further collection fees are charged unless/until the borrower re-defaults on the loan. In the event of re-default, collection fees are charged according to the same rules as if the loan were a first-time default. Collection fees are not capitalized in the rehabilitation process. Collection fees are only capitalized if a borrower consolidates the defaulted loans.”
The collection fee policy is different for FFEL loans that are not held by the Department. Guaranty agencies generally can charge up to 16% collection fees at the time of a rehabilitation sale. In July 2015, the Department clarified that guaranty agencies are not allowed to charge these fees if the borrower enters into a rehabilitation repayment agreement within 60 days after notice of default. The Department retracted this guidance in March 2017, but the FFEL loan collectors have said they will not charge these fees, at least not for now. Stay tuned while we wait for more clarity on this issue.
Perkins collection fee limits are 30% of principal, interest and late charges for first collection efforts and 40% for subsequent collection efforts.