Federal Direct Student Loan in Default. Can I get settlement from Dept. of Ed., or rehabilitate?
I have a (1) Federal Direct Student Loan it went into default in 1986. It has been in default ever since. There have been no payments made to it nor has it been in any type of forebearence or deferrement. The original loan was for around $7000.00 with interest it now stands at about $17,000. I want to get this out of my life. I have been trying to get information on Debt Settlements I understand that they can take a settlement @ 30%, 50% or 90% of the total acrued interest plus priciple. I have also read that they can rehabilitate the loan at PRE-DEFAULT status if I make 9 payments on time. Acrued interest and collections fees waived.
What would be the best course of action for pursueing a SETTLEMENT, should I go to the CA or directly to the Dept. of ED?. Is the Rehabilitation scenario I described above true or not?
—Shawn
Settling federal government backed student loan debts with the collection agency that the loan is placed with makes a surprising amount of sense. The collector and agency owner is often working on a contingency. This would mean getting paid, or paid better, only when resolving loans. This can make the student loan collector your advocate when settling.
Settling Federally Backed Student Loans
What you know and commented about options and amounts that can be written down when settling fed owned student loan debts, rather than rehabbing, is what I know too. With the Federal Loans, the settlement benefit comes from forgiving fees, interest and penalties – not principal forgiveness.
By working directly with the collector for the Department of Education you have someone whose interests are aligned… somewhat. Some variables may be the collector’s experience.
You should be prepared to discuss some personal financial information, and even provide documentation, to the CA representative.
Rehabilitating Federal Student Loans
You have far better options for rehabbing your federal loans than those who have private student loans. Not only do you have the benefit of rehabilitating payments that can have a positive impact on interest and penalty reduction, once a gov backed student loan debt is rehabbed, you can also gain some credit reporting benefits. With a loan in default as long as yours, the credit reporting benefits of loan rehab may not mean much, but I do want to point this out for any future readers.
Once federally owned loan is brought out of default you can then also qualify for income based repayment options and also seek additional government loan products.
Anyone with federal loans in default, or that are unaffordable, will benefit from watching this recent interview I did with Andrew Weber.
Andrew responds to reader questions and concerns in the comments below.
Anyone with questions or concerns about their federal student loans can post in the comments below for feedback. You can also call in for a consult at 800-939-8357, and choose the options for student loans that applies to you.
About Michael BoveeMichael started CRN in 2004 with a mission to provide people in need with detailed debt and credit help and education. Michael has participated as an expert panelist in federal consumer protection rule making, collaborated on state law changes governing debt consolidation, has worked as an expert witness in court matters related to the debt relief industry. He is available to speak with you about your financial struggle and helps people resolve their debt problems daily.
I am 73. Last year, my SS check was reduced by 15% for a student loan that was purportedly in default. Trouble is, I never had a student loan and have been out of school for almost 38 years. I can get no information other than that debt is with Dept of Education and the amount. SS says I have to deal with DofE and DofE says, basically, tough luck.
Hi Jean, this is unfortunately one of those situations where you shouldn’t have to hire an expert as you never had a student loan, but a federal loan expert is probably need to sort something like this out if you’ve already reached out to the Dept. of Ed and the SSA. You could get more information by logging into http://www.nslds.ed.gov, you will need to create an FSA ID to do so (you can do that on the same page).
I would consider also filing a complaint with the CFPB at http://www.cfpb.gov, and perhaps the federal loan Ombudsman office here: https://studentaid.gov/feedback-ombudsman/disputes/prepare (Scroll down to find their phone # etc)
If none of the above works then you may need to hire a federal loan expert to help get this straightened out. But I’d try the above steps first.
I defaulted, rehabbed, then ended up with 29k in fees and penalties added. Plus, the loan term was reset to the maximum. Those 2 things were NOT disclosed at the time I entered the rehab agreement. And now, the 71k debt I left school with is over 100k in, principle and over 40k in interest and capitalized interest. My only hope is dropping dead. I am 60. No way I will ever be able to pay this entire debt. When I have to quit working I can look forward to garnishment of my Social Security. Which is not enough to live on. No pension. Small 401k. I’m just done.
You may want to think about income contingent payment plans as you move forward. You can do something like that and not have to worry about Social Security garnishment.
Hi Lynn, I want to be absolutely clear that your only hope is not “dropping dead”. There is a viable strategy to make these manageable in retirement, but you’ll need to let go of the idea of paying them off. Instead the idea is to make them manageable and prevent negative repercussions, which is completely possible!
The income related payment plans such as RePAYE and IBR go off of your taxable income. SSI is not taxable income. So what this means is that your payments will be very low or even $0. Yes, the balance will not go down and probably increase, but that isn’t relevant. You just want to keep these at bay during your retirement. As long as you apply for these plans and stay on them (you may need to do Direct Consolidation first), you will have a low or zero payment. You just need to recertify annually with your loan servicer to stay on these plans.
This is a great strategy that works for many people, and it can work for you too. You can apply for Direct Consolidation and income related payment plans at https://studentaid.gov/ for free.
I was paying all my student loans and then due to serious circumstances I was sent to prison for 10 years. My parents tried to help with them but lost jobs and could not keep up and they went to default. I had a FFEL loan for about 10k$ which is now at $21k with interest and fees – my mom talked to the Dept of Ed when I was incarcerated and the length and they told her it would be written off and they would take care of it. never received a letter never heard from them again – then 2 years after I was out they took my income tax return in 2017 and again in 2018 but again I have never had a letter, nothing from them at all. I have tried to research this but just not sure who has this and or how to find out. I don’t have money to pay, but wondering why it started without notification.
Hi Josh, it sounds like you have a federal loan in default. You can get it out of default using one of the two (free) options I discuss in this article:
https://www.credit.com/blog/2016/07/how-to-get-your-student-loans-out-of-default-without-getting-scammed-151236/
Even if you can’t afford payments right now, by getting them out of default you can apply for an income-related payment plan which will allow you to have $0 payments until your income increases. If you go through the Direct Consolidation process I discuss in the article, it will automatically stop the tax offset. If you choose the other method, you will have to apply to have the offset stopped once that process (Rehabilitation) is completed.
Unfortunately this happens often with federal loans; although they do send a letter notifying of the tax offset, that can get lost or sent to the wrong address.
I think that there must have been a misunderstanding with the conversation that was had as federal loans are not written off when they default, and unlike normal loans they don’t have statutes of limitation either.
I was recently informed via Pioneer Credit Recovery that my federal student loans defaulted in August 2019. The amount was 169,072.68 (mostly interest acquired over the years) but now I am told it is $194,918. The additional $21,000 service change. That is a SIN. Is there any advice or resources to deal with this?
Hi Cindy, unfortunately there is a large default fee added to federal loans when they default. You may be able to have it removed by going through the Rehabilitation process. I outline the two main ways to get out of a federal loan default here:
https://finance.yahoo.com/news/student-loans-default-without-getting-090030703.html
I made a lump sum to navient and paid off my private loans. Now Pioneer Credit has my federal loans. They are having me me to make 9 payments of $100, in which I am now 5 months in to, to get my loans out of default. I was researching Pioneer Credit and I thought as of 2015 the dept of ed severed ties with Pioneer Credit. Now I am concerned why they have my loans. They currently hold $36,000 of my private loans. Any advice as to what I should do from here? Any advice how I can get this half of my private loans paid off. I am acquiring so much interest that I honestly don’t ever see my getting these paid off unless offered a lump sum.
To add a correction to post above, Pioneer Credit holds my federal loans. My private loans were paid off to navient.
Hi Nicole, Pioneer is owned by Navient and although they have been reprimanded recently, they are still collecting on contract for federal student loans as far as I’m aware.
The Rehabilitation program you’re on may be your best bet, followed by a payment plan related to your income once you’re out of default for federal loans. They don’t settle for much of a reduction, usually just a removal of fees.
Do you assist people with ffel federal student loan?
If you need direct assistance you can connect with someone in the network for a free consult.
Just wanted to add that you can apply for a different payment plan and/or Direct Consolidation at studentloans.gov for your FFEL student loan. The applications are free to fill out, although some people choose to hire a specialist to fill out the forms for them and help them evaluate options.
I have FFEL in default since 2004 what are the possibilities to settle the loan for less and by how much %? I work and live abroad, the loan has zero negative impact on me living outside of the states, but still I see I have to pay it off.
Any solid practical advice on how to negotiate with the collection agency?
Hi, it’s pretty difficult to settle federal loans for much of a reduction, but you may be able to get some accrued interest and collection fees removed. Only rarely will federal loans remove part of the principal for a settlement.
With any negotiation, you want to start out offering less than what you intend to settle for. Use specific dollar amounts, like $9,384 instead of $9500, for instance. Plug in the numbers to see what percentages you’re looking at, but don’t negotiate in terms of percentages (for example, “would you take 60%”)
This nonprofit has a page with a good idea of what to expect on federal loan settlements: https://www.studentloanborrowerassistance.org/loan-cancellation/settlement/federal-loans/
Here’s one for you. I have Student Loans from 1987 in the amount of $11,491 which is now with collection fees and interest $35,897. Boy, isn’t it nice to be the bank! Or Federal Government and their minions in this case. I thought that the Constitution states clearly that the Federal Government is not to be involved in business! Yes, it does state that.
After leaving school, having kids, getting divorced and hammered by the courts to pay child support, rent, car insurance, health insurance for the kids, and so on, the student loans had no choice but to be set aside. Today, I have made many bad decisions and now have 2 felonies and nobody will hire me to rack their yard. I live on $400 a month! Yep, that’s right folks $400 a month!
Consider me the poster child of what not to do. Nonetheless, I have no intentions of ever paying the Federal Government or their Pirates a dime. If they can put this nation in $18+ Trillion Dollars of Debt and not pay, I think I will follow what they do, not what they say.
Hi, I may have spoken with you in the past as I recall a very similar situation with someone I advised free of charge. If that was you, we discussed how doing Direct Consolidation and getting on an income-related payment plan at a low or $0 monthly payment is better overall than risking garnishment of SSI, which the government can do. And if this is the same person, you successfully consolidated your loans and got on to IBR. If you weren’t that person, then this strategy may also work for you.
I am in the process of settling a student loan for principal plus interest. In the settlement letter it says that this amount would be “full settlement and satisfaction of your obligations to the debt…”. The collection agency ACT has also stated over the phone that they will request a paid in full from the DOE.
I have two questions –
1) How will this be reported on my credit report (ACT says it’s the DOE that handles the reporting)?
2) Is there any chance the DOE will remove the default (I’ve received conflicting stories from the DOE)?
All in all this has been a very confusing process as the ACT says a lot of issues are up to the D.O.E. and the D.O.E. says that it’s up to the creditor. Every time that either myself or my lawyer speak with either party we get conflicting stories deepening on the person that we speak with.
Hi Chris, it should be reported as “settled – paid for less than the full balance”. This will look much better than a default.
The DOE will usually not remove the default notation once it’s settled, but it will show that the default was cured through settlement and that you have a $0 balance.
Thanks Lynn. Current balance is $76,000.00 I’d like to settle for $70,000.00 (or less).
Lynn –
Back in 2005 I defaulted on my student loans. Subsequent to default, I rehabilitated the loans, incurred the collection fee and have been paying the loans based on an IBR payment plan. Question: If I suddenly found myself with an extra pile of cash lying around, do you believe the lender (ACS) would be willing to accept an amount that was full principal and accumulated interest less some portion of the collection fee added to the loan in 2005? For example, if the original balance was $50,000 and the collection fee added $9,000 (18%), would it be reasonable to ask for a settlement of $55,000? Should I expect them to accept that? Thank you for your insights.
Hi Ken, unfortunately no lender, especially the federal government, will accept a settlement when your loans are current and you’re paying on 100% of the balance + interest. And with federal loans, as you mentioned, the collection fees can be a problem so it usually does not make sense to default on federal loans to try to settle.
The limited settlement reduction is often outweighed by the exorbitant collection fees, on federal loans. Private loans are a different matter though and a strategic default can sometimes be a viable strategy for those.
Hi Lynn
I’m not located in Canada, UK or any Scandinavian countries. Do you think I could negotiate a settlement for reduced principal or interest since they have no real way of seizing assets or garnishing wages from me? Also do I need to negotiate with DEBT MANAGEMENT AND COLLECTIONS SYSTEM since that’s whats listed on the NSLDS site or with progessive Financial Services? I’m not sure I completely understand the relationship between the two and my Direct Stafford loan form the US Dept of Ed.
Thanks for you insight here….
Hi I have a federal direct stafford loans from 1998 and 1999 with principal of $12,690 and interest of $2,307and I defaulted on the loans in 2009. Currenly I don’t live in the country and I don’t plan on returning to the US but I’m interested in paying of these loans. Obviously since I don’t live in the country so they cannot garnish my wages. Can I use this to call the collection agency and reach a settlement for a lower principal, interest, collection fee….There are no assets for them to seize and cannot sue me. What are the implications if I get in touch with them to try to rehab and / or settle the loan ?
Also via the NSLDS site, it says I that the ED servicer is DEBT MANAGEMENT AND COLLECTIONS SYSTEM but when I called them they said the loans are with a collection agency called Progessive Financial Services. Who should I be in touch and what is the difference between the two?
Also does it make sense to consolidate? I’m not sure I understand the upside to consolidating the loans?
Thanks
Hi David – I got your voice mail. I will call you tomorrow at the number you provided. I am on pacific time. Post a reply if there is a specific time that is best for me to call you.
Hi Michael,
Actually can we speak this upcoming Tuesday. If you can do around 9am ET. Thats probably best for me. Thanks.
No can do. I am always trying to focus on the back of my eyelids at 9 am eastern (that’s 6 am for me). I am typically in the office a few minutes shy of 11:00 am eastern every day.
ECMC says I have a student loan that has been in default for years. Every time a collection agency contacted me, I requested validation. No one was ever able to verify the debt. Time would go by and then another agency would contact me and so on. Finally ECMC contacted me and again I requested validation. They sent me one application (there are supposedly 3 loans). The only application they sent was altered without my initials. According to the “Indemnification Agreement for the Assignment of Federal Family Education Loan with Damaged Promissory Note or Promissory Note With Uninitialed Alterations” …”agrees that if any loan assigned… without an original promissory note or certified true copy in good condition should become uncollectable by reason of such damaged promissory note, or because it contains alterations without the borrower’s initials…” They sent 3 of these; I assume one for each loan they say I have. According to this form, by their standards these “loans” are uncollectable. They also show that some company I never heard of supposedly paid money on these loans in the last year or so. I obviously haven’t paid a dime, since I’ve been disputing this for years. How do I get them to clear these obviously uncollectable “loans”?
Have you contacted anyone about resolving the altered loan document issues other than sending debt validation requests? Did your correspondence thus far raise the indemnification agreement?
You can file complaints about the issues you are having. Have you filed any already, and if so, with which agencies?
I spoke to them again yesterday. They have a letter from me dated August 4th demanding they clear all of the “loans” based on the info in the Indemnification Agreements. The first thing I did when they sent the Indemnification Agreements was complain. It is supposedly going be looked into by their Legal Dept.
I would LOVE to file a complaint, but don’t know how or with whom. Can you point me in the right direction? Thanks so much.
Review this article and then file your student loan complaint with the CFPB.
I replied on the 11th, but it didn’t show. I faxed them Thursday, the 10th once again explaining everything in great detail. I gave them 7 days to cancel all loans with no penalty from the IRS, or I am filing complaints with the CFPB, the FTC, and the Dept. Of Ed.
The CFPB doesn’t handle federal loans. I had to go to the Dept of Ed Ombudsmen group. They were USELESS! I finally made a deal with ECMC myself.
I have already paid my loans but IRS sent part of my refund to pay student loans. How do I go about getting that money back.
Thanks
You will have to request those funds be returned to you. Do you have a CPA?
Dear Lynn,
Thank you for all your insights posted here. I am helping my fiance get his act together (because I want to marry him, but only after his federal student loan debt is rehabbed).
He defaulted 10 years ago, and his FFEL Consolidated loan is now with the US Dept of Ed. We are trying to uncover how much of his principal balance is in collection fees—he went through some serious personal hardships and lost every shred of paperwork.
Do collection fees get added to the principal every time the debt is reassigned to a collection agency?
The NSLDS database lists a 40K balance with 19K in interest, at 8%, but no breakdown of any past collection fees. Do you think we can negotiate past collection fees that have been added to the principal? Any chance of taking interest down a notch as well? Will they add more fees once the loan is successfully rehabbed?
Does emphasizing the “uncollectability” of the debt ever help with negotiating these numbers? He has no assets to speak of, earns very little doing odd jobs here and there, and won’t get social security for another 25 years. Prior to the hardship and default, he already paid off 27K of the original 25K borrowed.
Thank you, again. Really appreciate it.
Hello, collection fees continue to accrue as long as the account is in default, but the major collection fee which is around 18% of the balance is only added one time, typically 3 months after the 270 day default mark.
As you mentioned, NSLDS does not show these fees but if you log into your account on studentloans.gov, it should show the updated balance there.
With Rehab, some guaranty agencies authorize their debt collectors to remove the collection fee once Rehab is completed, but this is not universal.
As far as negotiating settlements on federal loans, they are usually pretty limited and they will often remove just collection fees and possibly some accrued interest. Although I have heard occasionally of federal loan guarantors removing a portion of principal as well.
Dear Lynn:
I have been reading many of your posts with interest. I would really like to talk to you for a moment. Please let me know how best to reach you. I am Jennifer Bjorhus, a reporter at the Star Tribune in Minneapolis. Jennifer.bjorhus@startribune.com or 612-673-4683. Thank you.
PS, With wage garnishment, does the interest continue t accrue and the collection fees continue to be tacked on? Thanks in advance, I am at a loss as to what to do.
Yes it does.. that’s why it’s a good idea to try to prevent a wage garnishment, or to get out of one via Rehab payments if you’re getting garnished. With all the default fees and interest accrual, wage garnishment is the most expensive way to pay off federal student loans.
I have FFEL defaulted loans totaling approximately $74,000 (with huge interest and fees added over the years) and is now in the hands of ACT (collection agency). ACT has sent me a letter stating they are seeking wage garnishment. They now list the balance at about 94,000. I will NEVER in my lifetime be able to pay what they are demanding, what should I do? If they do garnish, do I have ANY say in the matter? Do they ever take any of my monthly living responsibilities into account or do they just take? Thank you, struggling in Minnesota
Hi, you can often enter into a Rehabilitation plan prior to receiving a wage garnishment from the Dept. of Ed. You can also go through Direct Consolidation to get out of default as long as it’s done before the loans are certified for garnishment.
If garnishment is already taking place, you can make 5 Rehabilitation payments (on top of the amount being garnished) to stop the wage garnishment. There is also a way to dispute the wage garnishment, or to get the amount garnished lowered in some cases.
It sounds like one of the payment plans related to your income, such as RePAYE or IBR, would be a good fit once you get the accounts current again. The payments are based on 10-15% of your discretionary income, have limits on the amount of interest that can accrue, and they also offer 20-25 year forgiveness elements built into the plans.