Student Loan Collection — Differences in Private and Federal Student Loans
Student loans now exceed 1 trillion dollars. To put this incomprehensible number in perspective — that is more debt than all of the nation’s credit card debt. When there is a default on student loans, collection activities begin.
Do student loan collectors have unlimited powers?
Can they really take your tax refunds?
Garnish your wages whenever they want?
Is there really no statute of limitations on any type of student loan debt?
To get a handle on this situation, let’s look first at the similarities in collection powers and then the differences between private and federal student loans.
Similarities In Collection Of Federal And Private Student Loans
Under both types of loans, you can be sued by the proper party if you default on the loan. This makes sense as being sued is normally always an option if we default on loans.
You can face collection activities including:
- Negative credit reporting.
- Collection calls.
- Collection letters.
- You may also face abusive, illegal collection activities.
Under both types of loans, it is very difficult (but not impossible as collectors will often lie and say) to file for and receive a bankruptcy discharge. You have to show “undue hardship” which basically means you can not work anymore and have no hope to paying off the loan.
Another similarity is both federal and private student loan collectors must follow the Fair Debt Collection Practices Act (FDCPA).
They also must both follow the Telephone Consumer Protection Act (TCPA) which restricts certain types of auto dialed calls to your cell phone.
Differences In Federal And Private Student Loan Collection
Statute of limitation – none for federal loans. Private loans will be based upon the applicable state law and what the contract says. This can be for a short period of time or it may be a long period of time but at least it is not unlimited like the federal student loans.
Options to rehabilitate or consolidate to bring out of default – on a federal loan you can rehabilitate or consolidate (i.e. refinance) one time each if you meet the requirements. A private student loan collector does not have to allow you to do either unless the contract requires it (I’ve never seen that).
The definition of default – a federal loan is in default if you go 270 days without making a payment. A private loan is in default whenever the contract says it is. This usually is one missed payment. Or moving without providing a new address. Or filing for bankruptcy. Sometimes it can be when you default on another debt. You really have to read the contract closely to find out. Given that there is a statute of limitations, you might find the default happened long enough ago that no suit can be filed against you, no threats of a suit, ect.
Ability to wage garnish – under a federal loan, you do not have to be sued in order for your wages to be garnished. But you do have to receive a notice letter and have an opportunity to request an administrative hearing. (Note many collectors will lie about this — they say they can garnish you whenever they want). A private student loan collector cannot do this — instead you must be sued, lose the suit, and then you can be garnished if allowed under state law. This is the same as a credit card debt, mortgage loan, etc.
Ability to intercept government benefits or tax refunds – a federal student loan default can result in your government benefits being intercepted. There are some exceptions but this is a very powerful tool. A collection agency for a private student loan company cannot do this. Instead it is simply the same as a credit card debt, car loan, etc.
Powerful Collection Powers But Still Governed By The FDCPA
For any collector, whether collecting federal or private student loans, must abide by the FDCPA and cannot violate that law.
Well, they can violate the law. But if they do you can sue them.
In fact, if you don’t sue them, this will encourage them to continue violating the law against you and other consumers.
So appreciate the powers they have — especially if collecting a federal student loan — but understand these collectors are not all powerful and can be brought down when they violate the law.
They are so used to being arrogant, being heavy handed, and breaking the law in such an outrageous manner that they believe they are untouchable.
Suing them, as is your right under the law if they have violated the law, is a way to remind them that while they may be arrogant, they are just like you when they are in a courtroom in front of a jury — someone who is subject to the laws and they will have to accept whatever the judge and jury decide.
If you have been abused by student loan collectors or have any questions, get with a consumer lawyer in your state. If you live in Alabama, feel free to call us at 205-879-2447 or you can fill out a contact form.