Have Your Student Loans Been Sold to a Collection Agency? Here’s What to Do

If you’ve found that your student loans have been sold to a collection agency, you can do something about it. This guide will help you understand how you got here, and how to get out of it!

Main image courtesy of Penn State.

When you decided to attend college, one of the many decisions you had to make was how to pay for it. Right behind deciding which school to attend, determining how you’ll pay for four years of college can be daunting. Chances are you filled out the Free Application for Federal Student Aid (FAFSA) and were given an amount of aid that you qualify for. That aid could come in the form of scholarships, grants, work-study, and loans. 

Now that you’ve completed your degree, it’s time to pay back those loans that were a part of your student aid package. However, sometimes paying back your debt is a little more complicated and less straightforward than you might like. If you’ve found yourself struggling to make your student loan payments, you may run the risk of having your student loans sold to a collection agency. How did this happen, and what are you supposed to do if you find yourself in this situation?

Not to worry, we can explain all that and more in this guide. We’re going to cover:

  • How your student loan got into collections
  • What it can mean when your debt is in collections
  • How to get your student loans out of collections

Student Loans in Collections? How You Got Here

What transpires to send your student loan to a collection agency?

frustrated student with head on the desk

No one wants their loans with a collection agency, but it can  happen. Image courtesy of Grand Canyon University.

Before you set foot on campus, most likely you’ve already sorted out how to pay for tuition, room, board, and books. Generally, you pay for these with scholarships, grants, loans, and even work study arrangements. Thankfully you don’t need to worry about paying back grants or scholarships, but you will, however, need to think about how you’ll pay back your loans.

Unfortunately, student loans have risen to very large proportions, and are having an affect on many Americans’ lives after they graduate. In the U.S. there is $1.61 trillion dollars tied up in student loan debt, and many people are struggling to make their loan payments. Although President Biden has put a hold on federal student loan payments due to the financial hardships caused by the COVID-19 pandemic, this is set to expire on May 1, 2022. However, this freeze in payments only extends to federal loans. If you have private student loans, those are not affected by this and unless you have worked something out with your lender, still require payments. 

What happens when you’re struggling to find a job that can pay you enough to start making payments on your student loans? What if you haven’t been able to pay on your loans for a while and you get a notice that the loans have been sold to a collection agency? Well, it may be helpful to know that you’re not alone in this struggle, and many people across the country are trying to find a way to pay back their student loans. 

If you find that your student loans have ended up in collections, this means that they are in default, and you haven’t been making payments for 270 days. If you have privately held loans, you can be considered in default as soon as you miss a payment. Like other loans, these are typically sent to a collection agency after 90 days, instead of the 270 with federally held student loans.  

There are some warning signs to be aware of before your student loans end up in default and sent to a collection agency. Take notice if you:

  • Have a tight monthly budget. If your budget is so tight that one extra or unexpected expense can prevent you from paying your bills or buying necessities, then you may be at a higher risk of defaulting on your student loans.

  • Your interest rate/monthly payment has increased. If you have private loans with a variable interest rate, your lender can change the interest rate or the amount you owe. If this is your situation, this can really make a harmful impact on your ability to pay back your student loans.

  • You’re struggling to make payments on time. If you already find it difficult to make your payments on time, chances are you will continue for the foreseeable future to have a hard time making payments for an extended period of time.

  • You’ve missed payments before. If you’ve already missed payments in the past, you may be in a less than ideal place to continue to pay back your student loans unless something else changes.

If you’ve experienced any of these circumstances, you may be at a higher risk of defaulting on your loans and having them sent to collections. 

What It Means to Have Your Student Loans in Collection

What happens once your student loans have moved into default and collection?

Frustrated student worried about their loans

Defaulting on your loans can be scary, but there are ways to get out of collections. Image courtesy of NerdWallet.

If you’ve unfortunately fallen into default, you’ll have your student loans sold to a collections agency. This is not a great situation, because having your student loans with a collection agency can mean a couple of things and cause you additional financial issues. Once your loans are in default and an agency owns them, they will likely have fees added to them. So in addition to your original loan, you may find that a collection agency has added anywhere from an 18-40% fee onto the total amount of your loan.

The longer that your loan stays in default, the worse it can be for your future financially. In addition to having a fee from the collection agency put on your loan, you may also be susceptible to the following.

  • Having your wages garnished. When a collection agency is collecting a debt from you, they may be able to have your wages garnished and put towards that debt. Although there are rules about how and when debt collectors can contact you and how they can interact with you, they may be in their rights to garnish wages. If you are working, the debt collector may be able to take a portion of your wages and apply it to your debt.

  • Not being eligible for additional federal aid. If you’re thinking about applying for additional aid in the future to return to school or to finish your degree, if you’ve gone into default, you may be prevented from applying to and receiving federal financial aid.

  • Ineligible for deferments. Having your loans with a collection agency may also make you ineligible for deferments you may need in the future. 

  • Losing subsidized benefits on your loans. If you have federal loans that are subsidized you could lose those benefits once your loans go into default.

  • Impacting your credit score. Perhaps one of the biggest and longest lasting consequences to defaulting on your student loans and having them sold to a collection agency, is that it can impact your credit score for as long as seven years. This can hamper your ability to get a loan for a mortgage or a car, or to open a business.


How to Get Your Student Loans Out of Collection

What are the best ways to get your student loans out of default and collection?

student calculating their student loan amount

Work with your lender to find a repayment plan that works with your budget. There are a few federal programs that you may qualify for. Image courtesy of PsyPost.

If you’ve found yourself with your student loans in default and with a debt collection agency, don’t lose hope yet, there are ways you can dig yourself out of this.

If you have federal loans you can try these options.

Pay back/rehabilitation

If you’re able, start to make on time payments in the amount you owe. If you need to change the repayment plan you’re on, make sure to get in contact with the Department of Education, or the provider that owns your federal loans. Once you have gotten back on track with consistent payments, they can rehab your loan and take it out of default.


You may want to try consolidating your student loans, including the one(s) that are in default. You’ll need to speak to your lender, but this is contingent on ensuring you’re making on time payments in the amount required.


Although it can be difficult to get your debt discharged with bankruptcy, this may be possible. You’ll want to consider this carefully because declaring bankruptcy can make an impact on your financial situation for years to come.


If your loan is an amount that you can repay in full in one sum, consider doing this. However, because most student loans are in the thousands, this isn’t a viable option for many people.

If your student loans have been sold to a debt collection agency, this means that they are in default. In order to get them out of default, we suggest contacting your lender and working out a plan that allows you to start paying them back—and get your loans out of default and into rehabilitation. 

Bridget Houlihan
Bridget is a writer based in Pittsburgh, PA.
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