When a borrower defaults on federal student loans, the Department of Education can refer their account to a collection agency for the collection of loan debt. The collection agency keeps a certain amount of what you pay and gives the rest to the Department of Education. This amount, which is charged by the collection agency, is known as Collection Fees or Collection Charges.
The collection fee depends on the type of federal student loan that you have, whether you have rehabilitated or consolidated your student loan or not, and the average cost of recovering student loan debt. The amount of collection fee ranges from 18 percent to 40 percent of your outstanding loan balance. Interest rate is applied only to the remainder amount after deduction of collection charges.
Collection charges serve as an incentive to collection agency to encourage them to collect as much of the debt as possible.
Collection Charges for Federal Student Loans
There is no law that dictates how much collection agencies can charge on federal student loans. As a general rule, collection agencies charge a certain percentage of the total principal and interest that the borrower owes to the creditor. The percentage also depends on the cost spent by the collection agencies on collecting debts and their overhead costs.
Collection Charges for Direct, FFEL, and Perkins Loans
The Department of Education caps the collection fees charged on collection of Direct and FFEL loans to 25 percent of the total amount owed, which includes principal amount and interest. For Federal Perkins loan, the collection agency can charge 30 percent to 40 percent of the total debt.
Collection Charges for Rehabilitated and Consolidated Loans
Borrowers, who have consolidated or rehabilitated their outstanding federal student loans, are charged 18 percent of the total amount by the collection agency.
Collection Charges for Private Student Loans
In case of private student loans, the promissory note signed by the lender and the borrower contains information on how much collection fees can be charged by the collection agency. The debt collector cannot charge anything in excess of the amount mentioned in the promissory note.
How TurboDocs Can Help You?
Dealing with debt collectors can be stressful and costly. A collection agency may keep as high as 40 percent of the payment that you make to your creditor. In plain English, for every $100 paid, $40 goes right in the pocket of the debt collector. So if your federal student loans get into default, you end up paying the loan that you owe, the collection fee, and the commission.
TurboDocs is an organization that was established with the aim of making the loan repayment process stress-free. Our company helps customers in finding the optimal solution to repay their outstanding debts. Our team of experts reaches out to students and borrowers to keep them updated with the various loan repayment and loan forgiveness options.
Contact TurboDocs to find solutions to your debt problems. Call us at (855) 782-0744.